Cross-Asset Volatilities Decline as Traders Pivot Away from Hawkish Fed

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Implied volatilities declined across the board last week as the markets pivoted away from a hawkish Fed to an intense but ultimately positive US-Iranian weekend negotiation to end hostilities. USO 1M 25-delta call skew is now lower vs pre-War levels (USO call implied volatilities trading +3pts above comparable put implied vols vs a pre-War skew differential of +15pts). Interest rate volatility per VIXTLT Index has declined to a 1 percentile low despite both, the Fed’s hawkish tone and Kevin Warsh’s removal of forward guidance which in theory increases uncertainty (and therefore implied volatility) about future policy. Nonetheless, the probability of a 2nd rate hike still remains low (36%).
• The VIX^® Index traded in-line with the pre-established skew last week, declining 1 pt to 16.8 on a 1% advance on the SPX^® Index. Skew steepened from the 25th to 47th percentile on Friday as traders initiated hedges going into the long weekend. However, with the easing of geopolitical tensions, the demand for downside convexity has declined with equity vol-of-vol falling 20pts last week to 1-year lows (VVIX Index=88, 6th percentile).
• Last week Cboe launched two XSP^®-based products to offer simple defined-outcome exposures: XSP Binary Options and Quoted $1 XSP Vertical Spreads*. An examination of activity from its initial week of trading shows that institutions have been early adopters of the product (only the 2nd day after launch, nearly 100% of the 147.5K options traded originated from institutional flows). In terms of tenor, 1DTE binary contracts were favored over 0DTE by nearly 8:1.

Chart: Payoff: 88% of XSP Binary Options Volume Has Traded in 1DTE

^{Source: Cboe}

^{*The payoff for XSP Binary Options depends solely on whether the option finishes in or out of the money at expiration. Binary options that finish in-the money receive the full payout of $100 per contract, while binary options that finish out of the money expire with no payout. By contrast, Quoted $1 XSP Vertical Spreads have the same $0 to $100 payout range, but include an additional partial-payout zone within the $1 interval between the two strikes. As a result, a Quoted $1 XSP Vertical Spread can still have value at expiration when XSP settles within the $1 range between the two strikes, rather than being strictly all-or-nothing. For more information, please visit XSP Binary Options & Quoted XSP Vertical Spreads | Cboe or contact your Cboe sales representative.}

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