[ 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