More than 140 financial professionals, including top traders, strategists and researchers attended the fourth Annual Cboe Risk Management Conference (RMC) Asia on December 3 and 4 in Hong Kong.
Topics related to the management of risk and return in investment portfolios were discussed by 12 speakers at RMC Asia, including Tim Edwards, Tim Weithers and Cboe Chairman and CEO Ed Tilly.
Options/Volatility Fundamentals: Synthetic Option Strategies, Volatility Trading, and Futures and Options to Trade Volatility
Tim Weithers and Sheldon (Shelly) Natenberg, formerly co-directors of education at Chicago Trading Company, delivered a series of coordinated presentations on options and volatility fundamentals that covered the following topics:
Options/Volatility Fundamentals Part One: Synthetic Option Strategies
• There is more than one way to get long or short
• Arbitrage relationships
• Use of option risk measures (the “Greeks”)
• What are professional options market makers thinking?
Tim showed how long and short positions (and, later, various strategies) can be created in multiple ways via stock (spot), futures, and/or options. This led to the rationales for being long/short, addressing price targets and timing; the relevant specifications for employing options as part of one’s strategy involve the choice of exercise price(s) and expiration date(s) -- commonly referred to as "strike selection." He then introduced/reviewed option risk measures as relevant considerations for option traders/option market makers (covering delta, vega, theta, rho and gamma).
The session concluded with the notion that the motivation, considerations and results of option strategies for fundamental investors/hedgers often can be very different than those of options market makers (given their typical directionally agnostic delta-neutral hedging activities).
More topics covered included:-
- Ways to get long an asset: long stock, long future, long call and short put
- Options risk measures (delta, vega, theta, rho, and gamma)
- Synthetic option strategies (e.g., buy-write as a short synthetic put)
- Relevant considerations for investors and hedgers vs. options market makers
- Traditional approaches to trading volatility
- Buying and selling volatility futures and options
- The term structure of volatility and volatility of volatility
- Traditional options trading: Capturing an edge in a volatility trade
- Volatility term structure and typical volatility options skew (to the calls)
Ed Tilly, Cboe Global Markets Chairman and CEO
Welcome and Cboe Update BY ED TILLY
Edward Tilly, Chairman and Chief Executive Officer, Cboe Global Markets, provided a conference welcome and update in which he covered a number of topics, included in the following comments:
- For three decades, Cboe RMC has delivered a premier financial industry conference for institutional users of equity derivatives and volatility products across the globe.
- Last year, Cboe completed its acquisition of Bats and throughout 2018, we’ve made great strides to integrate the business operations and technology of the two companies. Our coordinated efforts across multiple locations in the U.S. and abroad enable our equities, derivatives and FX sales teams to interact more frequently and efficiently with clients.
- Growth in Asia. We are working to expand our distribution network in terms of execution brokers and data/trading vendors facilitating access to our markets. Korea, Australia and Hong Kong have contributed to the growth in our options markets, while Taiwan and Hong Kong have contributed to the growth in our futures markets.
- Global Trading Hours. Our futures trade on the Cboe Futures Exchange (CFE) nearly 24 hours a day, and our key index options trade from 2:00 a.m. Chicago time, or 4:00 p.m. in Hong Kong. Volume during Cboe’s global trading hours has been on the rise. Liquidity during global trading hours has been building due to strong volume. The overnight sessions provide the opportunity to not only gain U.S. equity market exposure, but to hedge risk and trade global volatility as news breaks -- rather than waiting for regular trading hours to start in the U.S. Our global trading hours enable investors to trade on news and events in the U.S. and around the world.
- VIX Update. Cboe is home to the Cboe Volatility Index®, considered the world's barometer for equity market volatility. The VIX® Index is based on options on the S&P 500 Index, and Cboe offers trading in VIX options and VIX futures. The return of higher volatility in October that led to record volumes in SPX options and VIX futures was fueled by an 11 percent decline in the S&P 500 comparable to the move we saw in February. Yet, the VIX Index and VIX futures suggest that the current volatility environment is different than what we experienced earlier this year. Announcing changes to the VIX Weeklys complex, Tilly said effective December 3, Cboe converted the VIX Weekly options symbol to VIXW for both regular and global trading hours. The minimum price increment for all VIXW options series, regardless of price level,also was changed to one cent. By changing the price increment from a nickel (5 cents) to a penny (1 cent), the end user can execute more precise trades with less time premium, likely resulting in a narrower bid-ask spread.
- SPX Update Estimates for the notional value of daily volume in SPX options have grown from $12 billion in 2002 to $390 billion in the first half of 2018. With a large notional size, traders may create some downside protection without committing a large amount of capital. We’re providing greater access and a wider selection of SPX-related products to meet a variety of trading needs. By adding more expirations -- including Monday, Wednesday and Friday Weekly expirations that cater to short-term views or events -- these products have become more accessible and flexible than ever before. And we’ve seen great growth in Cboe SPX Weekly Options (SPXW). In fact, we’ve seen record average daily volume numbers in our SPXW series. October was a record month for SPXW with an ADV of 1.1 million contracts. Our SPX Weekly options product has experienced amazing growth with four of our top five record ADV months occurring in 2018. We added these expirations after many of our customers, including those at our Risk Management Conferences, requested them.
- Partners MSCI, FTSE and S&P. Our index suite, enhanced by our strategic alliances with key index providers such as S&P Dow Jones, MSCI and FTSE Russell, offer investors exposure to global volatility and the U.S., international, and emerging markets.
- I encourage you to check our website for our full list of risk management conferences in 2019, kicking off with Cboe RMC U.S. in California this March.
Dinny McMahon, Author and Fellow at The Paulson Institute
Keynote Speech: After the Deluge: Deleveraging and the Challenge of Cleaning up China's Debt
A keynote speech on China was delivered by Dinny McMahon, Fellow at The Paulson Institute and author of "China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle."
Dinny noted that the U.S. is beginning to raise interest rates, but China is aiming to keep interest rates low.
Mandy Xu, Chief Equity Derivatives Strategist, Credit Suisse
Interpreting Volatility-Related Indicators & Determining Courses of Action
Mandy Xu, Chief Equity Derivatives Strategist at Credit Suisse, delivered a 49-slide presentation on “Interpreting Volatility-Related Indicators” that covered these topics:
- Understanding signals from skew, correlation, and vol-of-vol dynamics, especially in the context of February and October market moves
- Determining which measures fit what investor needs and market conditions
- How to structure trades based on these indicators
- Options-based measures of correlation are derived from the volatility of index options vs. constituents, and they measure the average correlation of a portfolio of assets
- Implied correlation is forward-looking
- Correlation is a measure of macro vs. idiosyncratic risk
- Implied correlation is not a reliable predictor for stock market direction, but it has been for future realized correlation
- In high-correlation environments, consider selling index options, and in low-correlation environments, consider switching to single-name overwrites/underwrites
- While some people think of 2017 as a year of record-low volatility, in 2017 single-stock volatility was 4 points higher than the 2014 low;
- Regarding volatility of volatility, in the summer of 2014 the VVIX Index hit an all-time low of 62 and spent two months below 75, while in 2017 the VVIX never fell below 75 and averaged 90
- S&P skew recently flattened throughout the Oct/Nov sell-offs, with one-month put skew falling to 2-year low, and the majority of client activity has been concentrated on monetization of hedges, with continued volatility selling from the systematic community, and
- A trade idea - consider call spread collars to take advantage of the elevated levels of volatility and flat upside skew.
Below is a Cboe chart showing the Cboe SKEW, Cboe VVIX and Cboe JCJ S&P 500 Implied Correlation indexes since January 2008. Both the SKEW and VVIX Index hit all-time daily closing high values in the past two years.
RMC speakers Josh Lisser (left), Head of Index Strategies, AllianceBernstein, wth Vijoy Chattergy, Founder and President, VMLH, LLC, with RMC Asia attendee
Case Studies in Institutional Portfolio Construction: How Options and Futures Can Help
Vijoy Chattergy, Founder and President, VMLH, LLC, and former Chief Investment Officer of the Employees’ Retirement System of the State of Hawaii, delivered a presentation that covered these topics:
- Comparisons of Canadian pension models, the Yale endowment model and recent experiences with the Employees’ Retirement System of the State of Hawaii (HIERS)
- What are the problems that Institutional investors face, and how do problems vary by Institution type?
- Solutions in the real world
Vijoy noted that there are many types of institutional investors, from the Yale Endowment to Canadian and U.S. pension funds, and that they can have very different incentives, structures and culture.
For the option-writing programs at HIERS, Vijoy noted (1) that Cboe's BXM and PUT option-writing benchmark indexes facilitated the introduction of the covered call and cash-secured put-write programs at HIERS.
HIERS' biggest risk was another damaging meltdown similar to the one investors experienced in 2008, but the HIERS option-writing programs are very conservative, disciplined (with covered writing every month) and unleveraged. The HIERS option-writing programs have had less volatility than the S&P 500 Index, and HIERS created functional risk classes.
Here is a Cboe chart of the most severe drawdowns experienced by key indexes over the past three decades:
A member of the audience asked: “What kinds of options did you use?”
Vijoy answered, “We used exchange-listed options, generally about one-month in duration and near-the-money.”
Another audience question: “What were the hurdles you experienced in convincing the board to use options?
Vijoy's answer: “We wanted to help the board feel both safe and innovative. Cboe's benchmark indexes (BXM and PUT) were helpful as we created a new designated asset class with less volatility.
Using Options for Downside Protection
Josh Lisser is Head of Index Strategies at AllianceBernstein, a money-management firm with more than $500 billion in assets under management. Josh delivered an 18-slide presentation on downside protection for portfolios that covered the following topics :
- Options protect but can be costly to implement and hold
- Are their effective alternatives? What are the trade-offs on cost and protection
- Sizing, operational and liquidity considerations of hedging strategies
Josh stressed that investors should take into account the options Greeks - delta, gamma and vega -- when designing a protective put strategy.
Josh noted that extending maturity loads on lower-cost vega rather than expensive gamma can be cost-effective.
He also discussed the protective focuses of clients in North America and Asia, and of insurance companies.
The Evolving Role of Macro Effects in Risk and Volatility
Tim Edwards, Ph.D., Managing Director of Index Strategy, S&P Dow Jones Indices, delivered a 38-slide presentation that covered these topics --
- From “Risk on/ Risk off” to “Winners and Losers”
- The dynamic evolution of market, sector, country and single stock risks as the fiscal cycle turns
- Volatility and correlation structures in U.S. sectors and benchmarks
- Country versus Sector from risk and performance perspectives in European and Asian markets
Tim discussed sector dispersion and the U.S. election in November 2016.
In his conclusion, Tim discussed a number of topics, including correlations, dispersion and sectors.
Panel Discussion: The Future of Equity Options and Volatility Markets
Sharon Ang, Managing Director and Head of Asia-Pacific at Cboe Global Markets, served as moderator for a panel discussion that featured these expert panelists:
- Eddie Lau, Chief Investment Officer, Rongtong Global Investment
- Bharat Sachanandani, Head of APAC Flow Strategy & Solutions, Société Générale
- Laurence Scofield, Fund Manager, MacroValue Investors Limited
The panelists discussed the index options and volatility markets and these topics --
- How market dynamics have changed this year
- Strategies for navigating volatility
Laurence expressed appreciation to Cboe for introducing him to more uses of options and volatility products.
CONCLUSION AND THANK YOU TO OUR SPONSORS
Cboe was pleased to host this event, which allowed the user community in the region to meet and discuss their various outlooks and uses of the Cboe’s proprietary product line. Cboe appreciates the enthusiasm and participation of the community and looks forward to more educational events in the coming years.
Cboe especially thanks the conference sponsors:
- Bank of America Merrill Lynch
- Credit Suisse
- FTSE Russell
- S&P Dow Jones Indices
- Societe Generale
More information about Cboe RMC Asia is available at www.cboermcasia.com, including the full agenda and speakers’ biographies.
To learn more about ways in which index options and volatility products can be used in portfolio management, please visit these links –
www.cboe.com/SPX S&P 500 index options
www.cboe.com/volatility Dozens of Cboe's volatility indexes
www.cboe.com/benchmarks Cboe’s strategy benchmark indexes, and related research papers by Wilshire and other firms.
www.cboe.com/funds Funds that use options
www.cboe.com/strategies Options strategies
www.cboe.com/education Options education
www.cboeRMC.com Cboe Risk Management Conferences in Europe, Asia and the U.S.