[ M A R K E T R E V I E W | E Q U I T I E S ]
Volatility returned with a bang in February as VIX options trading spiked and investors clamoured to hedge options in the face of a new risk regime . Sarfraz Thind takes a look at what decisions are available to investors that are considering hedging , or whether it ’ s even necessary in the current market .
After a freakishly calm year with volatility levels tethered to record depths the VIX , the de facto gauge for volatility , exploded on 2 February as the market was jolted by a surprisingly high US inflation number and investors rushed to hedge positions in the options markets as a result .
A record 4.3 million VIX options contracts changed hands at the Chicago Board Options Exchange ( Cboe ) that day , trouncing the previous record of 3.1 million set last December . That trend continued throughout the month of February , which saw the largest and most dramatic increase in options volumes , surpassing all previous monthly records .
The message is clear : volatility is back . The current year marks the start of a new regime and risk — the kind that hurts — has become the key word for institutional investors .
“ The volatility regime in which we used to live is behind us ,” says Franz Wenzel , institutional solutions strategist at Axa Investment Managers . “ Volatility is back in the 14 % to 15 % range and it won ’ t go away . The idea is straightforward – we expect no more multiple expansion .”
While stocks have revived to a certain extent , investors continue to pore over the implications of the sell-off . Many analysts believe that sharp equity drops may grow in frequency while returns will be muted in the latter part of the year . For equity investors the overriding question is , therefore , how to hedge yourself ?
Equity options The most apparent tool for buy-siders with short- and medium-term hedging concerns are equity options . Having seen its records shattered throughout February , the Cboe is expecting continued growth of its S & P options contracts , with chairman Ed Tilly remarking how well VIX products
46 // TheTrade // Spring 2018