When buying a VKO put, an investor is betting that a further market downturn will be accompanied by realized volatility below the variance budget, since this type of option will expire worthless otherwise. The VKO is a cost-efficient hedge that monetizes the steep skew and elevated implied vol in a long premium / maximum loss format. The variance budget is set lower but close to the fair variance strike (- 19) to reduce the cost of the VKO. If the market trends lower on muted vol, VKOs may survive similarly priced D&O puts. Additionally, If spot has rallied (or stayed flat) with low realized vol after the trade is initiated, the VKO would behave like a regular put for the next down leg but it would have cost you significantly less to put on. VKOs (particularly those struck in-the-money) are generally collecting theta so can carry better than vanillas. Variance budget of 18 shows low historical likelihood of being breached tot gusinoss Clay Ryalivid Volatility ' t% 40% 30% 20% 10% — — — Variance budget 0% /an-al Ian-09 Jan-10 Jan•12 Jan-13 lan-14 lan•15 Jan-16 Ian-17 Jan-IS 14x ix 10x 8x 6x 4x Ox Payoffs of the103 strike 6M VKO D&O puts • Buy March-19, 97.5% put with KO barrier at 85% for - 0.6% vs vanilla put-spread for - 2% or a - 70% discount gilifingigai r iagg§§§ggigna . N .. r triSmo.o rNe‘r. •4 1.4NedfshaiNNINNINNPiN Down and out puts (D&O) are knocked out if the level of the underlying falls below a certain barrier level over the observation window (typically the life of the option). They settle like regular options if the barrier is not breached. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0093148 CONFIDENTIAL SDNY_GM_00239332 EFTA01389016