Tag Archives: Volatility

Developments in Volatility & Option Markets – Event Recap

· · Leave a comment

by Steve Dixon, CFA

On January 12, 2016, Mr. Russell Rhoades from The Options Institute shared his insights and observations on the options market with Society members and other event attendees.  The discussion centered around the innovation of Weeklys just a few years ago and the proliferation of more frequent settlement of stock and index options that has resulted.  Weeklys are now available on about 350 stocks and about 70 ETFs.  Still, Mr. Rhoades was puzzled by the relatively slow uptake by institutions to utilize options contracts that settle each week compared to the traditional monthly settled contracts.  Outside of the institutional realm, trading in Weeklys has been the source of growth of the CBOE over the past several years.

Mr. Rhoades spent time explaining the opportunity inherent in selling at-the-money options with a week or less to expiration to capture the time decay of the contract premium.  This time value, which erodes gradually during much of the contract’s life, accelerates toward zero in the final few days to expiration thereby providing the sweet spot for traders looking to capture the natural decay of part of the contract’s value.  This acceleration isn’t as prevalent for contracts trading in-the-money.

The discussion turned to VIX, as all do these days.  Weeklys on VIX were introduced about six months ago and seem to provide the closest replication of VIX that is possible at present.  In a graphical display, Mr. Rhoades showed the overlay of a VIX Weekly contract over the final five trading days to expiration with the index itself.  The two moved very similarly even when VIX experienced sharp changes.  The mean-reverting nature of VIX provides opportunity for traders and hedgers as well.  The complication has been the effective replication of VIX, to which Mr. Rhoades believes short-dated VIX options provide the best solution to date.

Noting that “the market takes the stairs up and the elevator down”, Mr. Rhoades highlighted several indexes that the CBOE has created that pair traditional long-only positions with a variety of options strategies.  Among his favorite are the CBOE S&P 500  PutWrite Index and the CBOE S&P 500 2% OTM BuyWrite Index.  The former generating absolute and risk-adjusted returns superior to the S&P 500 Index over the past 25-plus years.  Displaying his innovative foresight, one society member suggested that the CBOE consider a 30-Delta PutWrite Index, which seemed to preoccupy Mr. Rhoades with excited anticipation for the remainder of the presentation…only at a CFA luncheon could such a sentence be written!

Mr. Rhoades was an effective presenter, drawing on CBOE trading data and personal experience to illustrate what’s new in the world of options.  Keep an eye on Russell 2000 Index options as they have been the fastest growing index option series of late and as volume improves may offer better opportunity for more effectively hedging portfolios.

Recap of Society Luncheon – The Return of Volatility – Monetary Policy Divergence Brings the Return of a Long Forgotten Friend

· · 1 Comment

By Tom Halloin, CFA Society Minnesota Intern

Central banks are starting to diverge in their monetary policies. Marvin Loh, a Managing Director at BNY Mellon Global Markets and the firm’s senior fixed income market strategist, spoke with CFA society members about potential consequences of diverging monetary policy between central banks. Interest rates, for instance, have collapsed worldwide since the financial crisis in 2007, with some countries such as Germany realizing near-zero or negative yields on bonds out to seven years. While the Federal Reserve of the United States has stopped purchasing securities through Quantitative Easing, European and Japanese central banks continue their own quantitative easing programs in order to stimulate their economies. As a result, the best currency trade in recent months has been to buy the dollar and short the euro.

The diverging monetary policies also extend to the Federal Reserve’s decision whether to raise the Federal Funds rate. Many investors are anticipating the Federal Reserve will increase the Federal Funds rate as early as this June.  While the consensus among economists is that inflation will remain low for the foreseeable future, the Federal Reserve wants to mitigate the creation of asset bubbles as a result of a prolonged period of near-zero interest rates. There is less consensus, however, as to when the Federal Reserve will start to raise rates and how quickly rates will increase in the next two years. This lack of a consensus is an issue because markets can react violently to any slight change in monetary policy. With diverging policies between central banks internationally and diverging expectations on interest rate changes in the United States, expect volatility throughout the fixed income world in the near future.