Abhinandan Deb from Bank of America Merrill Lynch led a discussion with Roni Israelov from AQR and Neale Jackson from 36 South Capital Advisors to kick off the afternoon session at RMC today. This was a unique session in that the panelists compared and contrasted either harvesting risk premium or hedging risk with volatility which was appropriately titled Volatility: Harvest Premia or Hedge Risk?
An opening statement from Roni was that we are here learning about not losing money or manage risk (hence the name Risk Management Conference). He noted that the derivative markets allow investors the ability to transfer undesired risks to other market participants. The way the investor gets someone to take on this risk is to pay them a premium. Market pricing is the level where those hedging and those willing to take on risk (and receive premiums) are balanced.
Neale also had an opening statement where he notes premium harvesters receive more in premiums than what they expect in future risk. With respect to timing Neale quoted Yogi Berra who said, “You don’t have to swing hard to hit a home run, you just have to have good timing.” This was in response to being asked about the importance of market timing.
Other highlights included a discussion of risk premiums being consistently present in the market regardless of the prevailing volatility regime. This means that over the long term option buyers will lose money. Short dated options have the most premium, but the reason they seem to have the most premium is because they often have the most gamma for a short term big move in the underlying market.
A final question addressed what will it take to move out of the current low volatility regime? One thought centered around biggest input that might cause increased volatility that has dropped relates to interest rates. The proposition that there may be any change in rates has gone down tremendously so a change in that attitude may result in higher equity market volatility.