The final session on Day 1 of this year’s CBOE Risk Management Conference in Hong Kong posed the question, “What’s Implied from Implied Volatilities and Volatility Products?" This session was a combination of talks from William Chan, Head of Asia Pacific Equity Derivatives Research for Bank of America Merrill Lynch and Tim Edwards, Senior Director of Index Investment Strategy for S&P Dow Jones Indices.
Edwards kicked the session off by discussing VIX and noting that there is not much of a difference between VIX and realized volatility. He also noted there is a strong relationship between realized volatility and subsequent volatility. That being said he noted that the volatility market or VIX missed the mark with the US election, but we all know VIX wasn’t the only one guessing wrong with respect to the outcome of the election.
Before hanging things over there were a few takeaways offered from Edwards’ presentation. He noted that the forward looking aspects of VIX are easy to infer using known tendencies in realized volatility and expected premiums. He also pointed out there are several VIX indices covering all major asset classes and most regions of the world. Finally, he pointed out that VIX is driven by more than just market volatility.
Chan’s section started out talking about the impact of event risk on implied volatilities. He demonstrated this using earnings announcements and the impact on individual stock option implied volatility. Basically it rises dramatically into earnings and then drops dramatically after the announcement. He also noted the S&P 500 (SPX) option market was pricing in a 3% move the day after the US election. The result was a 1.1% move, but an intraday move between up 6% and down 5%.
He spent a fair amount of time discussing listed volatility derivatives and aspects of non-US oriented volatility. He finished with a look at the current level of VIX relative to other risk factors and left us with a warning that VIX is not discounting global macro risk as one would think it should be considering pending disruptions.