Buzz Gregory Discusses Skew, Term Structure, and Volatility Around the World

On Friday Krag “Buzz” Gregory, Equity Derivatives Strategist, Goldman Sachs delivered an illuminating presentation on Volatility Around the World. Key topics covered included skew and term structure.


As an introduction to an overview of Buzz’s remarks, I note that in 2014 the average daily close for the CBOE Volatility Index (VIX) was 14.2 for the second year in a row, and the CBOE SKEW Index had its highest-ever average daily closing value of 129.8.Ch-2015-03-06-0800-SKEW Index


Buzz had a very informative hard-copy handout with 55 slides.

Buzz walked through the global supply/demand story for equity derivatives and analyze some of the consequences, and addressed the following questions

  • Why are skew and term structure highest in the US?
  • Why is the term structure so flat in Nikkei 225?
  • In the U.S., the VIX tends to be negatively correlated with S&P 500 returns. That is not always the case across global indices. Why?
  • Why do dividends tend to trade cheap in Europe?
  • What is the impact of lower rates in the equity derivatives market?

Points made included:

  • Supply/Demand: Hedging demand continues to be a primary driver for listed S&P 500 tenors. New bank regulations will continue to keep upward pressure on S&P 500 skew.
  • Market Impact: Skew tends to be elevated on SPX (highest globally).
  • Variable Annuity Story: Much less VA hedging now than a decade ago. But hedging flow still impacts the options market.
  • Market Impact: S&P 500 term structure tends to be the steepest globally.
  • Structured Products: In the US, structured products have traditionally not had much of an impact on the overall vol surface given high liquidity. They may have impacted single stock vol more than index vol this cycle.


Buzz presented highlights from some past research papers —

  • In their landmark 1973 paper, Fisher Black and Myron Scholes commented:  “the actual prices at which options are bought and sold deviate in certain systematic ways from the values predicted by the formula. Option buyers pay prices that are consistently higher than those predicted by the formula….There are large transaction costs in the options market, all of which are effectively paid by options buyers.”
  • In a 2003 study, Bondarenko concluded that put options on the S&P 500 are systematically overpriced, stating: “For ATM puts to break even (i.e., to have the average excess return of zero), crashes of the magnitude experienced in October 1987 would have to occur 1.3 times per year.”
  • In their 2004 paper, “Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?”, Bollen and Whaley found that a majority of S&P 500 index options trading involves puts. In fact, 55% of all index option trades over the time period they analyzed were in puts, vs. only 33% for single stock options. What’s more, they found that put activity is dominated by buyers, with the largest buying pressure in OTM and deep OTM puts. Buzz noted that this confirms what we see in option data:  the expensiveness of index put options is consistent with hedging supply/demand.


Key points made include —

  • Skew for the S&P 500 index is highest globally (vs. stock indexes for other countries)
  • Longer-dated skew is highest in the US; lowest in Japan
  • Put skew is highest in the US; lowest in Japan
  • Call skew is highest in Japan, lowest in the US
  • Skew may remain high: The regulatory framework has changed
  • S&P 500 skew is near decade highs
  • US Variable Annuity market still has an impact on longer-dated SPX implieds
  • Term structure for the S&P 500 index tends to be the steepest globally (vs. stock indexes for other countries)


Here are links to webpages with more information –


Term Structure updates

White Papers on index options


Buzz Gregory manages macro derivatives on the Options Research team at Goldman Sachs, where he specializes in equity index options, variance swaps, correlation and VIX products. He joined Goldman Sachs in 2000 as a member of the Equity Derivatives Strategy team, where he specialized in volatility and hedging strategies, with a key focus on the VIX Index redesign in 2003 and the VIX futures launch in 2004. Buzz was named Managing Director in 2011.  Gregory earned a PhD in Statistics from the University of Virginia. He also earned a master’s degree in Mathematical Finance from the University of Chicago, a master’s degree in Mathematics from the University of Illinois and obtained his undergraduate degree in Mathematics from Brown University.