Peter Carr recently gave a talk on volatility trading at the Fields institute. Summary: In general, an option’s fair value depends crucially on the volatility of its underlying asset. In a stochastic volatility (SV) setting, an at-the-money straddle can be dynamically traded to profit on average from the difference between its underlying’s instantaneous variance rate…
Read More Volatility, Skew, and Smile TradingThe volatility index was created more than 30 years ago. Since then it has become a favorite tool for both speculation and risk management. There is now strong evidence that VIX futures and related exchange-traded products are changing the market dynamics. Specifically, in the early days of the VIX, the cash market led the futures.…
Read More What Do Creators of the VIX Think of Volatility?Last Thursday witnessed, again, another dramatic increase in volatility. The volatility index VIX spiked 44 percent to 16.04%, its highest daily close for the year. As shown below, the VIX futures term structure inverted in the short end. Two days before the event, Helen Bartholomew of Reuters warned that the net short position in the…
Read More VIX Futures Leads Cash Market: Tail Wags DogIt happened again, and again. Last Thursday volatility increased sharply at around 1.30 p.m, then it came back to normal at the end of day. For now, we ignore the cause. But this event reinforced our observation: sharp volatility spikes occur more and more frequently these days. In a low volatility environment like this one,…
Read More Potential Black Swans and How to Hedge Against ThemQuantitative trading has become a topic du jour lately. Many investors have been considering allocating more capital to quantitative funds. However, not all experts share the same opinion regarding the merits of quantitative strategies. There are even quants among the skeptics. Emanuel Derman is one of the most respected experts in the quant community. He…
Read More Do Quantitative Trading Models Work?In the continuation of the “Low Volatility is Not a New Normal” theme, Adam Samson of Financial Times published another post based on the recent report by JPMorgam which suggested using VIX options for managing the risks. Risk assets, like stocks, have been rallying “for years”, sending market volatility near “record lows… While fundamentally volatility…
Read More VIX Options: Should We Buy Them When Volatility is Low?Last week, JPMorgan issued a report on the state of quantitative investing and the current low volatility environment. The report pointed out that despite the political uncertainties (Comey testimony, UK elections, ECB, geopolitical uncertainty, Qatar etc.), the volatility remains subdued. In fact, in the last 20 years the VIX closed lower than 10 for a…
Read More Low Volatility is Not a New NormalWith the popularity of Exchange Traded Funds on the rise and an exponential increase in short interests in the volatility ETFs, it’s just a question of time that ETF issuers will launch new instruments aiming at the volatility markets in other geographical locations. Indeed, last month, VelocityShares issued 2 new volatility ETFs that allow investors…
Read More VSTOXX European Volatility Exchange Traded Products: EVIX and EXIVLast Wednesday saw a huge increase, in percentage terms, of the volatility indices. The 1M spot VIX increased by 46%, while the underlying SPX index decreased by only -1.8%. As discussed in our previous post entitled Is Volatility of Volatility Increasing?, such a big percentage change in the VIX associated with a “normal” down day…
Read More What Caused the Increase in Volatility of Volatility?In the previous post entitled Relationship Between Credit Default Swaps and Equity Options we discussed about the link between high yield spreads and equity volatility. We also provided an academic reference that formally proved their relationship. Basically, there is a high degree of correlation between the VIX and high yield spreads. Recently, John Lonski of…
Read More Is The Volatility Index VIX Too Low Compared to High-Yield Spreads?