One of the final presentations of the day was a discussion of Alternative Products for Locking in Volatility Targets featuring Thong Wei Koh from Kinetic Laboratory and Bruno Dupire from Bloomberg.
Koh’s part of the presentation was titled TIXX Futures A New Gamma Product which was a discussion of an idea he has for capturing realized volatility. He has developed a method of measuring the absolute daily price moves for the underlying market. He is proposing TIXX futures contracts that are based on the observed absolute daily return of the underlying reference index as a measure of market actively. TIXX is calculated using the average of absolute daily percentage changes in an underlying. 1% move = 100 (0.01 x 10,000).
Koh asked the question, “why do we care about realized volatility?” He states that the cost of price behavior can often be related to actual volatility of the market, not just downside volatility. Also, wild market swings up and down can result in substantial losses. A realized volatility product like TIXX may be a solution to capture both upside and downside volatility.
Bruno Dupire thine followed up by talking about situations where you may be right on a correlation outlook, but hurt by changes in volatility. When you want a volatility trade implemented you either want a pure volatility trade that isolates volatility or a conditional volatility trade that may also have exposure to other factors.
Dupire pointed out that Volatility can be played through a variety of methods from index options, VIX futures, VIX options and volatility related exchange traded products and even over the counter volatility products. Dupire also discusses the TIXX futures saying it is a linear version of a variance swap as you do not square returns.
He finished up discussing pair trading between VIX and VSTOXX. Both are highly co-integrated with a spread that mean reverts. He notes that spread trades can be expanded to include more than just two securities. Of course this is a bit more of a challenge as far as coming up with the optimal portfolio or strategy.
Dupire finished up with the following points – first that trading pure volatility requires some care, there are opportunities when combining vanillas with a spot product, the term structure of volatility can be exploited, and more complex opportunities continue to evolve as the number of assets considered is expanded.
You can find more information on TIXX that Koh discussed at www.kineticlaboratory.com/