Global Equity Volatility Insights Want a cheap call on EU equity? Monetise correlation through EU bank dispersion we estimate 68% of the 20 June 2017 Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] US Extract alpha from summer SPX range as policy and positioning “collar” equities With the Federal Reserve last week appearing more emboldened to normalize monetary policy, risk asset bears have come out in force. While we agree that a changing Fed reaction function is likely not supportive of substantial equity upside, we think the “Yellen put” still exists, albeit with a lower strike. Hence, we see monetary policy as providing a near-term “collar” (long put/short call) on a US equity market already prone to getting trapped in record-tight trading ranges. Further impetus for a summer rangetrade should come from (i) fiscal policy, as gridlock caps equity upside but policy hope floors the downside, and (ii) positioning, where the risk of continued “fragility events” (potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-up investors still accustomed to buying dips. As a risk-limited range trade, we like buying in-the-money down and out puts on the S&P. For example, an SPX Sep 2475 put that knocks out at 2300 (6% OTM) indicatively costs 70bps (spot ref 2451), a 60% discount to the 2475 / 2300 put spread. Europe Long EU banks dispersion: Buy Dec17 call on a basket, sell worst-of call We recommend positioning for greater dispersion in EU bank sector returns via buying a Dec17 105% call on an equally-weighted basket of Santander, BNP, ING, Intesa and Deutsche Bank, part-financed by selling a worst-of call on the same basket for 1.8% (net) indic., as: 1) improving macro/earnings, sensitivity to rates and regulatory headwinds are likely to lead to greater differentiation within banks, 2) the entry point is attractive given historically low implied vol (13 th 8y+ percentile) and high implied