CBOE RMC Europe Day 1 Recap

The first day of Risk Management Europe is in the history books.  Today was more like a half day, starting at 12:30 and running to 4:30, but in that short period of time we heard from four individual speakers as well as a lively panel discussion.

Bill Speth from CBOE kicked things off discussing the suite of strategy indexes that are offered by CBOE.  Most traders are familiar with the CBOE S&P 500 BuyWrite Index (BXM) which depicts the performance of a consistent covered call strategy that combines a long S&P 500 portfolio and consistently shorting SPX call options against that portfolio.  Recently CBOE introduced several more strategy indexes that incorporate Weeklys or show the performance of consistently trading an Iron Butterfly using SPX options.  Bill also mentioned that by the end of the year we should expect a full suite of strategy indexes based on Russell 2000 Index Options (RUT) trading.

Matt Moran followed Bill with a discussion of recent studies that show the benefits of using option contracts in a portfolio.   He noted the rapid rise in the number of mutual funds that incorporate option oriented strategy.  He also mentioned that large pension and state managed funds are getting involved in option oriented strategies.  The studies Matt specifically discussed may be found at the www.cboe.com/funds

The second session of the day involved two different speakers addressing the same topic which was Harvesting Volatility Risk Premium as Volatility Starts to Turn.

Abhinandan Deb, the Head of EMEA Equity Derivatives Research at Bank of America Merrill Lynch took the stage and focused on two aspects of volatility.  First he discussed his view as to where the volatility market is and where it is going.  Then he used this framework to talk about taking advantage of volatility risk premium in a higher volatility regime.  He noted that in higher volatility regimes call overwriting has been an effective method of outperforming the market and reducing risk.  He also stated that risk premiums as defined by variance minus subsequent realized volatility has been consistent across both low and high volatility regimes.

Bernhard Brunner, Head of Analytics & Derivatives and AllianzGL Global Solutions followed Deb and had a similar message with respect to benefitting from consistent risk premium.  He noted that over different time periods risk premium is consistent, something I found interesting since the term structure of VIX is not consistent.  He pointed out three things we know about volatility, it mean reverts, it has jumps, and it forms different regimes.  The one out of those three things that has a negative impact on harvesting risk premium is the jumps.

The final session of the day was a panel that mixed sell side, buy side, and liquidity providers in a discussion of the option markets.  A general theme I picked up on was that the buy side seems to be becoming more sophisticated.  They are branching out into more complex strategies and open to moving beyond their home countries to trade listed derivatives.  The feeling is that this increase in sophistication is good for all market participants.  It results in a more orderly market structure, even in times of increased volatility.

Day 1 is done and day 2 is just a few hours away.  Matt and I will continue to post blogs as sessions come to an end and @CBOE will tweet tidbits of interest throughout the conference.  If you couldn’t make this one check www.cboermc.com – the first Asian conference is just a few weeks away and in the spring we return to Florida for the next US version of Risk Management.