Volatility Traders Position for Long Convexity on Global Tech Consolidation

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• With the exception of equities and credit, implied volatilities amongst the major asset classes remained steady w/w following last week’s global AI/ Tech consolidation. Rate vols remain near one-year lows (2nd percentile) and treasury yields across the curve leveled off at slightly higher levels after jumping sharply post-FOMC. As oil prices and vols continue to fall, commodity traders are now looking to take advantage of the cheaper oil vols to hedge against the possibility of a supply driven rebound. Oil call skew is now noticeably steeper w/w with 1M 5-delta, deep out-of-the-money calls now trading at a 22 pt premium (+8pts w/w) vs at-the-money calls.
• The VIX^® Index had a controlled response to last week’s 2% SPX^® Index pullback with the volatility gauge rising 2 pts to 18.4 (68th percentile) and trading mostly in-line with the pre-established skew. Skew flattened from the 47th to 29th percentile as traders initiated long convexity positions going into this week. (Coincides w projected EOM/ semi-annual pension & balanced fund rebalance of ~$20-40B from equities to fixed income.) Implied volatilities for tech heavy global equity indices including Nasdaq-100 and Kospi-200 both of which AI/Tech sector holdings exceed 50% are now trading at 98th percentile highs. Although stock dispersion remains nominally near all-time highs (DSPX = 42.5, COR1M = 9.5), as shown in Exhibit 2, differentiation stems from dispersion between AI/MAG7 vs ex-MegaCaps rather than a broad dispersion throughout the entirety of the S&P-500.
• This month Cboe launched two XSP^®-based products to offer simple defined-outcome exposures: XSP Binary Options and Quoted $1 XSP Vertical Spreads*. Now in its 2nd week of trading, the ~200K in options notional volume traded this week (primarily 0DTE 740 XSP binary calls) originated from retail flows.

Chart: Payoff: XSP Vertical Spread vs Binary Option

^{Source: Cboe}

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^{*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.}