The second presentation on day one at Cboe RMC Asia paired John Hiatt, Director, Research/Quantitative Market Support at Cboe Global Markets with Tim Edwards, Senior Director of Index Investment Strategy at S&P Dow Jones Indices.  Their discussion focused on Interpreting and Navigating Volatility Based Benchmarks and Indicators. 

John Hiatt started things off discussing the performance difference between at the money buy write and at the money put write indexes.  I’ve included two of his charts below. 

First we have the Russell 2000, Cboe Russell 2000 BuyWrite and Cboe Russell 2000 PutWrite performance from 2001 through November 2017.  Note all three indexes move in line with each other, but the put selling index outperforms over time. 

RUT PutWrite Performance

The same issue with a put selling strategy outperforming a comparable buy write and buy and hold shows up in the SPX market.  The chart below shows the performance for the S&P 500, Cboe S&P 500 BuyWrite Index and Cboe S&P 500 PutWrite Index from 2001 through November 2017. 

SPX PutWrite Performance

John noted the slight differences between the put write and buy write indexes.   A buy write will sell an option that is just out of the money to the upside, while the put write sells a put that is just below where the market is trading.   He also noted that the special opening quotation (SOQ) that AM settled index options settle into has a slight upward bias. 

His final topic covered the state of volatility linked ETPs.  He demonstrated how the roll-yield impacts (usually negatively) the performance of long ETPs like VXX.  He gave an overview of the ETPs as group noting that 5 ETPs account for 85% of the assets in the space (XIV, VXX, SVXY, UVXY, TVIX in order as of Nov 30, 2017).  Including the next five ETPs results in 95% of assets in the volatility linked ETP space. 

Hiatt Ditribution of ETP Assets

Tim Edwards took over and started his session noting that the VIX methodology is used globally and not just broad based equity indexes.  The table below is directly from his presentation.

Edwards Table of Vol Indexes

He then jumped into an interesting discussion of the distribution of equity market returns when VIX is in different regimes.  He defined a low regime as below 12, the middle regime as VIX being between 12 and 20, and a high volatility regime defined as VIX over 20.  The chart below is lifted from his presentation.   Note the higher the VIX, the wider the distribution of equity market returns, both to the upside and to the downside.

Edwards SPX Performane Disrtibution

He finished up breaking down the performance or information in products like the Cboe SKEW Index or indexes that the volatility linked ETPs are designed to replicate.  Finally, he had a paper that is hot off the presses titled, Reading VIX:  Does VIX Predict Future Volatility.  I’ve already read this paper twice and it is a must for anyone following VIX as an indicator.  It can be found at the link below.

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