The TRADE 53 | Page 62

[ M A R K E T R E V I E W V olatility is back on the table. After one of the most muted years on record, with the VIX—the Chicago Board Options Exchange (CBOE) vola- tility index—hitting record lows, August has seen an increasing numbers of spikes in volatility coupled with a seemingly large amount of pre-positioning for rising volatility. But trading volatility is no simple matter. Getting exposure to an index like the VIX remains challenging and views on trading it are mixed. So what should an investor seeking to exploit this benchmark be aiming to do? The popularity of trading volatility has never been higher. Futures and options volumes on the VIX have been skyrocketing in 2017. The current year has already recorded four of the ten all-time busiest trading days in VIX futures, while both options and futures had their busiest ever trading day in August. Undoubtedly the major trade of the year has been shorting vola- tility. The interest in this comes against a background of unusually low levels of the VIX. The index, which remains the most looked-at gauge of volatility in the market, has been hovering around 12 for much of the year—compared to the average of around 16 last year— and dropped to historical lows of 9.36 in July. The low levels have puzzled some commentators given the potential for turbulence from recent macro and political events. “It is very unusual having the VIX at historic lows,” says Tom Lehrkinder, a senior derivatives analyst at TABB Group. “It is really 62 TheTrade Autumn 2017 | V O L AT I L I T Y T R A D I N G ] “Instead of being at new lows it should be at new highs. Maybe the VIX is not the right instrument but the VIX is the only game in town right now.” TOM LEHRKINDER, SENIOR DERIVATIVES ANALYST, TABB GROUP perplexing with everything going on in the US and North Korea and Brexit. You would think the instability would kick off the VIX. Instead of being at new lows it should be at new highs. Maybe the VIX is not the right instrument but the VIX is the only game in town right now.” Others believe the VIX has been a reflection of the slow and staid underlying financials of the global economy and the lack of action on interest rates that has charac- terised financial markets for the better part of a decade now. “The macro outlook has been positive,” says Russell Rhoads, director of education at CBOE’s Options Institute. “We have seen a continued slow improvement in the economy and the odds of a rate hike have been taken off the table and pushed back to 2018 which could account for the low realised volatility. It is currently a Goldi- locks economy, but we could be near the end of it.” In any respect the continued decline of volatility has provided a goldmine for investors pursuing the short volatility trade. Spikes have been followed by a sharp move back down as short sellers have come in to dampen volatil- ity levels, rather than seeing the heightened risk reaction more typical in the past. Investment in the XIV inverse short-term VIX futures exchange-traded note