Abhinandan Deb, Managing Director and Head of Global Cross Asset Quant Investment Strategy at BofA Merrill Lynch, delivered a presentation on “Volatility Regime Change – Signs, Symptoms and Solutions” on September 13 at the 7th Annual Cboe European Risk Management Conference (RMC).

Topics covered by Mr. Deb included: 

  • What to watch as we leave ultra-low volatility behind
  • Diversification, relative value and defensive strategies

Key points covered included:

  • The VIX® Index spikes usually have been shorter-lived relative to their magnitude since 2014.
  • Markets are fragile in part because of lower trading liquidity
  • In 2018 year-to-date, big down days have trumped big up days by the most since the 1980s
  • Idiosyncratic risk is back: stock volatility has been supported even as index volatility has fallen
  • Equity-bond correlation is near zero over the long term, but consistently negative in the last 20 years
  • He suggested looking to diversifiers with long convexity exposure, dispersion, and long forward volatility

STRATEGY IDEA – VIX SINGULARITY ‘HEDGE’

One of the strategy ideas presented by Mr. Deb was the VIX Singularity Hedge, in which the investor takes these positions:

  • Buy one-month 50-delta VIX call options, and
  • Sell 0.85 x two-month VIX futures.

The VIX future roll down (because VIX is in contango on most days) has the potential to help contribute to cost of VIX call, and the VIX call option has the potential to jump in value if the VIX futures prices increase.

MORE INFORMATION

To learn more, please visit the links below:

Options strategies http://www.cboe.com/strategies   

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