Skew Charts to Prepare for Conference in Hong Kong

This month I am planning to travel to the First Annual CBOE Risk Management Conference (RMC) Asia, which will be held on November 30 – December 1 at the JW Marriott Hotel, Pacific Place, 88 Queensway, Hong Kong. In my preparations for the trip, I am analyzing the skew charts for a number of option classes, including options on the S&P 500®, the CBOE Volatility Index® (VIX®), and the EEM and FXI ETFs.

SKEW CHART FOR SPX OPTIONS

As noted in the White Paper on the CBOE SKEW Index, after 1987 the SPX options smile “has lost its symmetry and it is biased toward the put side.” Out-of-the-money (OTM) SPX put options generally have higher implied volatilities than out-of-the-money SPX call options, because in the United States there is heavy demand for downside protection with stock index put options. 1 - SPX Skew on Nov 12

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SKEW CHART FOR VIX OPTIONS

The VIX Index often moves in the opposite direction of the SPX Index, and investors often use OTM VIX call options for some portfolio downside protection in times of market stress.2 - VIX Skew for reviewSKEW CHART FOR OPTIONS ON EMERGING MARKETS

Listed options that can help investors manage emerging markets risk include options on the EEM ETF, and options the MSCI Emerging Markets Index (MXEF).

Key features of MXEF options include:

  1. Large Notional Size — around $82,800 per contract with the  index at 828 (approximately 24 times that of options on the EEM ETF)
  2. No Early Exercise of MXEA Options – European-style Exercise
  3. Cash-settlement with No Delivery of Stocks or ETFs
  4. Price and Quote Transparency with Competitive Auction Markets for Leading Option Contracts
  5. Daily Mark-to-market for SEC-regulated securities
  6. Clearance of Transactions is guaranteed by the Options Clearing Corporation
  7. Tax Treatment under section 1256 of the Tax Code. Profit and loss on transactions in certain exchange-traded options, including MXEF options, may be entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the U.S. Tax Code.

To learn more about options the MSCI Emerging Markets Index (MXEF), please visit www.cboe.com/MXEF.3- EEM

 SKEW CHART FOR OPTIONS ON ISHARES CHINA LARGE-CAP ETF (FXI)

It is interesting to note that there is more symmetry in the skew chart below for the FXI options than there is in the three skew charts above. At RMC Asia I plan to learn more about differing slopes in the skew charts for worlwide options.4- FXI Skew

MORE INFORMATION

Information on the CBOE SKEW Index is at www.cboe.com/SKEW.

On Twitter RMC updates are available at #CBOERMC.

Much more information on RMC Asia is available at http://www.cboermcasia.com/