Abhinandan Deb from Bank of America Merrill Lynch and Jean-Gabriel Prince from BlackRock split duties discussing the Volatility of Volatility.
Deb led things off noting that we need to care about the volatility of volatility as we continue to see robust growth in volatility related option trading volumes and open interest. He showed several examples of how VIX price changes are skewed to the upside which demonstrates the distribution of volatility. He also showed how VIX futures react relative to changes in VIX and how the time left to expiration for a VIX future impacts how the contract reacts relative to the index. Stated differently shorter dated VIX futures have more beta relative to VIX than longer dated VIX futures.
Prince followed up on Deb’s comments by highlighting tail risk hedging with VIX options and generating carry with VXX options. He first points out that VIX is a risk, not just a tail risk measure. For tail risk he cites the SPX 90% – 110% one month option skew or VIX at the money implied volatility as better tail risk measures. In addition he notes that volatility tends to rise as markets fall which may increase the magnitude of gains or losses. He then cites several reasons to consider VIX options for a tail hedge including high liquidity, that they are exchange traded, VIX gives exposure to volatility through delta by also through volatility of volatility, VIX options offer non-linear exposure to VIX futures, and capital efficiency where $1 vega of VIX exposure tends to hedge against $100 of equity exposure.