The 6th Annual European version of CBOE’s Risk Management Conference kicked off with a presentation from Bill Speth, Vice President of Research and Product Development at CBOE and Tim Edwards, PhD, Senior Director of Index Investment Strategy for S&P Dow Jones Indices. 


Tim kicked things off breaking down VIX in several ways and explaining what VIX tells us.  He referred to VIX as a crowd sourced projection of market volatility.  He noted that VIX is mean reverting and also stated that over the long term the overestimation of VIX is about four points.

Tim discussed SPX option skew starting out saying, “people know what skew is, but often don’t know what to do with it”.  He produced a slide showing tail events happen more than the models price them in.  For instance the market prices in a 15% loss for the DJIA once every 450 years, but these drops have historically occurred about once every 10 years.  He finished up the discussion of SPX Skew by showing a slide that combines VIX with SKEW to show a unique perspective of VIX plus tail risk concern. 

Bill took over for Tim discussing recent developments at CBOE and noted that his approach always involves looking at information provided by option pricing and apply it as a practitioner.  Bill spoke about BuyWrite Indexes that are quoted by CBOE.  Using the Russell 2000 BuyWrite Index (BXR) and Russell 2000 PutWrite Index (PUTR) he showed the slight differences between the two indexes which contribute to the returns being slightly different for these strategies.  The expiration mechanics on settlement day for Russell 2000 options is a major contributor to the outperformance of PUTR versus BXR. 

He then turned to discussing VIX, Implied Correlation and the CBOE SKEW Index (SKEW) as measures of expected risk.  Both VIX and SPX Implied Correlation have been at historic lows while SKEW has hovered around all-time highs for most of 2017.  He noted that SKEW has been working higher since 2008. 

Bill also discussed a new paper by Yoshiki Obayashi, Antonio Mele, and Kshitij Dhingra titled “Market Timing with Implied Volatility Indices”.  This paper notes that drawdowns tend to coincide with periods of high realized volatility and that implied volatility indexes tend to lead future realized volatility.  The full paper may be found at the link below –