Buzz Gregory of Goldman Sachs at Risk Management

The second session on Tuesday featured Krag “Buzz” Gregory who is the Equity Derivative Strategist at Goldman Sachs.  He gave an excellent overview of VIX trading and described different strategies that can be implemented based on different market environments.

Highlights –

  • In addition to equity investors, credit investors have used VIX futures and options to manage risk.
  • He quoted a market saying “When the VIX is high it’s time to buy, when the VIX is low it’s time to go.” – His statement is it’s not that easy!
  • To fully use VIX when considering the market you need to understand the VIX curve.
  • He addressed the low absolute value of VIX lately and noted that the high volatility risk premium has been taken out of the market which has been accurate
  • Looking at the VIX curve he notes that the risk premium was too high from March 2009 to June 2009 and have returned to fair value based on an improving economy
  • He addressed when to roll VIX futures positions.  He notes that about 80% of the roll on a 1 month VIX future occurs over the last week of trading
  • He covered whether to use SPX or VIX options to hedge – the short answer is it depends on strike risk with SPX or basis risk with VIX
  • Strike risk – if you buy a SPX put and the S&P 500 moves up the option can move to a zero delta
  • Basis risk – a grind lower in the S&P 500 may not result in higher VIX
  • He noted that in 2013 the VIX spikes have come off low volatility which will have an impact on the VIX hedging decision
  • He was asked about the risk premium of single stock options versus index options and he noted that the risk premium is typically higher for single stock options
  • A great audience question was on the new S&P 500 Short-term Volatility Index (VXST) and how it may impact VIX trading – he noted that 40% of SPX option trading is on options that have less than 10 days to expiration – this new index is a great way to capture the information in this short term option trading