Bill Speth from Cboe Global Markets teamed up with Mandy Xu, Chief Equity Derivatives Strategist Credit Suisse, for a session titled Interpreting Volatility-Related Indicators, and Determining Courses of Action.
Bill started out noting that the recent market activity has shown that many people understand volatility, but just as many do not understand volatility. Cboe is taking on the task of raising the bar to try to educate more market participants on volatility and VIX. He discussed VIX, SKEW, and VVIX as indicators as well as the relationship between VVIX and VIX. He clarified that VVIX is a predictor of the price change in the 30 day forward VIX and not the spot VIX index. This meshes with VIX option pricing having a closer relationship with the corresponding futures than spot VIX.
Mandy’s portion of the session builds on Bill’s discussion about signals with examples of how to approach different outlooks. She started out contrasting February of this year with all of 2017. She notes the press referred to VIX has being too low indicating low fear in the market. This isn’t an accurate depiction of VIX. For example, if a market participant comes in and aggressively buys out of the money SPX call options it could push VIX to higher levels. She highlights several skew related measures as being a better depiction of market fear than VIX. Looking at the low VIX in 2017, she states it was low, but not too low when compared to the record low realized volatility in the S&P 500. As an interesting side note she pointed out that the record low correlations resulted in record low realized volatility.
In the current environment she sees less skew that a month ago as well as VVIX having returned to pre-Feb 5th levels. Also correlations are back in line with historical levels. Mandy finished up with some trading examples based on differently outlooks. For a bullish outlook she showed an example selling an OTM SPX Put and then buying an OTM Call Spread. This takes advantage of OTM options being more expensive. If bearish on the S&P 500 she showed a straightforward OTM bear put spread. Finally, she demonstrated getting long volatility with a targeted timing outlook by selling an OTM VIX Mar Call and buying an OTM VIX Apr Call. The IV of OTM March VIX options is higher than that for comparable April options, if you expect a stock market correction between March and April VIX expirations this trade makes a lot of sense.