[ 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
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Autumn 2017
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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