Buzz Gregory, Equity Derivatives Strategist at Goldman Sachs, delivered a very informative session on VIX and SPX option trading today in Hong Kong.  His speech hit on a topic that was frequently mentioned at RMC Europe a couple of weeks ago, the current shift in volatility regimes.

Highlights of Buzz’s presentation include –

  • It was noted that both SPX and VIX option volumes continue to steadily grow with volume experiencing dramatic increases occurring around market events
  • About 36% of SPX option volume occurs in contracts with 10 or fewer days to expiration and just over 50% of VIX option volume occurs in the front month contracts
  • VIX tends to trade at a premium to realized volatility with the average spread being about 4 volatility points
  • He cited an interesting statistic from Bondarenko (2003) who stated that to break even when purchasing ATM SPX Put a crash of the magnitude experience in October 1987 would need to occur 1.3 per year
  • He spent some time equating VIX to the economy and noted that VIX is higher during recessions stating that the average for VIX during recessions is around 26 while it is 17 during periods not experiencing a recession
  • When discussing structuring a VIX trade he noted four factors to consider – S&P 500 returns, term structure premium, volatility risk premium, and mean reversion of VIX versus its long term average
  • With respect to using SPX or VIX options to hedge a portfolio Buzz noted that it is not necessarily an either / or decision

These bullet points are a very high levels view of Buzz’s presentation.  He’s been an observer of both SPX and VIX derivative markets and has unparalleled insights into both markets.  This presentation left me with a lot to think about with respect to uses of VIX and SPX options to manage portfolio risk or speculate on a market outlook.