Chart 13: The -2.5% drop in the NDX on 17-May was a six standard Chart 14: The 60 sell-off in the NDX on 17-May has helped drive short- deviation (60) event relative to trailing realized volatility and the fourth dated Tech implied vol higher relative to S&P vol, although the absolute worst risk-adjusted daily return since 1985 level of Tech vol still remains historically low 6 40% _ aa 16% 4 35% NDX vol = 2nd %-ile 44% 2 30% 12% 0 29% 10% 5 20% 8% - 15% 6% 4 10% 4% 6 5% 2% -8 0% +-—_—____-———_+ 0% 10 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 '85 '87 ‘89 '91 '93 '95 ‘97 '99 '01 '03 '05 ‘07 '09 '11 13 ‘15 17 ——.NDX 3M ATM implied vol — Daily NDX return / trailing (EWMA) vol 1 ——— 17-May-17 NDX - SPX 3M ATM implied vol spread (right) Source: BofA Merrill Lynch Global Research. Daily data from 4-Feb-85 through 2-Jun-17. Source: BofA Merrill Lynch Global Research. Daily data from 17-Jun-09 through 2-Jun-17. EWMA = exponentially-weighted moving average realized volatility with lambda = 0.94. Hedge near-term reversal risk via FANG stock replacement or NDX put spreads As we have previously noted, asset bubbles can be notoriously difficult to trade, as fundamentals give way to chasing higher highs, and derivatives can be a key tool for capturing asset price upside while mitigating reversal risk. Chart 15: Proxy hedge screen for a Nasdaq 100 (NDX) benchmark suggests NDX is the best hedge for itself, as basis risk runs too high with other assets LD Nov08 (-39%) 2) Mar08 (-18%) 3) Mar09 (-15% 4 Augi1 (-14% 5) Feb16 (-13%) 6) Juld6 (-13%) 7) Jult0 (-12%) 8) Aug15 (-10% 9) Nov12 (-10% 10 May12 (-9%) S&P500 © OZOG es 1 7) 3 NDX ESTX50 @ 6 1 7 COG 31014 NIKKEI @ 3 8 9300_0_@ 10 HYG ©& 9 1015 on ET 3 MAO MmCCOML OD — OG H © FISE @ © 1 > OW (0_© TWSE @3 5 7) 9)6 8 1 1004 HS! @ 6 7 _0__O¢ 5310 NIFTY @ 8 m0 : o_ 6 6 HSCEI (9 6 7 3 e 1(8 mpm ON 4 2 5 | KOSPI @ 5 8 9)m@i(3 umm 6 ml 10 4 Aluminum 2) @ 8 3) AOI DG EES NGO= = JO3_OD.| 40 TUT? OCDmE 9) @ 3mm SL 7 | | () ASX200 © 6)(8 (5) Bm} 17 2