Equity investors who want a broad-based hedge have essentially three vehicles from which to choose: equity index options (SPY, SPX, ES, etc.), VIX futures (or their ETF permutations), and VIX options. In this piece, Larry McMillan makes the case for using VIX options instead of SPX derivatives, and this is his best argument:
In my opinion, the purchase of VIX calls is a much better, more dynamic way, to approach protection. That is because VIX will explode whenever the market declines sharply,…
One average of the volume of contracts traded in VIX futures recently exceeded the level observed during the financial crisis of 2008, indicating that sophisticated traders and investors may be preparing for an end to the recent run-up in equity prices. The chart below shows the volume of trading in VIX futures (VX) since January 2008, along with a 20-day simple moving average of that volume; as evident there, the average volume in recent weeks is greater than at any…
Paul Dawson and Sotiris K. Staikouras, “The Impact of Volatility Derivatives on S&P 500 Volatility,” Journal of Futures Markets advance online (2009).
This study investigates whether the newly cultivated platform of volatility derivatives has altered the volatility of the underlying S&P500 index. The findings suggest that the onset of the volatility derivatives trading has lowered the volatility of both the cash market volatility and the cash market index, and significantly reduced the impact of shocks to volatility. When big sudden events hit…
Volatility as an Asset Class: A guide to buying, selling, and trading third-generation volatility products, ed. Israel Nelken (London: Risk Books, 2007). Israel Nelken, one of the members of the CBOE New Products Committee, has collected 11 essays on the theory and practice of trading volatility as a distinct asset class. The first half of the book examines the measurement of volatility and ways to employ volatility models on several traditional underlying products. The second half is devoted to discussion…
Following up on our recent post about VIX futures, a reader asked:
If you want to get short volatility, why not just sell some of those VIX futures here, or maybe a vertical spread of VIX options? Why mess around with equity indexes at all?
Good question. The difference depends on what you mean by “volatility.” VIX futures are a pure vega play, which is to say that they give you exposure to changes in implied volatility, but that’s it. A short…
Wednesday, June 30, 2010
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