Beyond VIX: Trading Volatility and Variance Across Asset Classes

Bill Speth, Vice President for Research and Product Development at CBOE began the last session of the conference discussing Beyond VIX: Trading Volatility and Variance Across Asset Classes.  He talked about the reasons people trade volatility.   Some primary reasons are the negative correlation to equity returns and corporate credit, unique properties of volatility that create trading opportunities, and the benefit of exchange traded products.  He discussed S&P 500 Variance Futures that are a method to trade realized variance which is quoted using the same quoting convention as OTC products.  He then talked about the CBOE S&P 500 Short-Term Volatility Index and highlighted the relationship between VXST and VIX.  A relatively new area Bill address was interest rate related volatility indexes that CBOE quotes – CBOE Interest Rate Swap Volatility Index (SRVX) and CBOE/CBOT 10-year US Treasury Note Volatility Index.   He also touched on the wide variety of volatility indexes offered by CBOE with a focus on the individual equity indexes and how they show the anticipatory nature of volatility in front of corporate events.

Bill showed that VIX, VXN, and RVX tend to be in sync during periods with the equity markets are correlated.  He then demonstrated that volatility indexes created their own character as market correlations began to break down.  At times there are distinct natures to equity market related volatility indexes.  Bill notes this can result in interesting relative value trades.

Chris Rodarte who is a Portfolio Manager for Pine River Capital Management followed Bill and talked about considering volatility products across asset classes, systematically hedging across asset classes, historical results of the CBOE S&P 500 PutWrite Index (PUT) as a demonstration of the cost of hedging, and VIX and volatility indexes of other assets.

Rodarte used the PutWrite index to show how being more dynamic with respect to hedging outperforms a static hedge that consistently buys SPX puts.  He then shifted the focus to other volatility indexes, citing OVX and GVZ specifically.  His focus on OVX and GVZ was due to the different relationship of those volatility indexes relative to their underlying markets.  VIX is negatively correlated to performance of the S&P 500.  He then shows that OVX has a slight negative correlation to USO while GVZ is not correlated to GLD.  OVX and GVZ are both great indexes to demonstrate that implied volatility behaved differently over different asset classes.  For example both OVX and GVZ can increase when their markets move higher or move lower.

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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