Cross Region Volatility Analysis for Investing and Hedging

Benoit Meulot from BTG Pactual and Shane Carroll from SG Securities joined up to lead a discussion on Cross-Region Volatility Analysis for Investing and Hedging.  Meulot led things off by discussing the differences in the behavior of different aspects of market volatility among US, European, and Asian markets.  Carroll followed up with a discussion on how market participants approach trading these differences.

Meulot’s discussion focused on how supply / demand imbalances impact equity volatility surfaces by region.  He notes that the moves are more extreme in Asia due to lower liquidity.  Another unique characteristic of the Asian markets relates to the use of warrants which are being purchased to participate in upside moves in underlying stocks.  He also noted this is a very popular strategy in Hong Kong.  Asian institutional flows usually focus on buying options, with the exception of activity out of Japan which is more covered call oriented.  The market in the US was described as opposite of Asia as it consists of more put buying and call selling.  Finally, it was noted that Europe falls somewhere between the US and Asia with a combination of protection buying and structured products being utilized.

Carroll then followed up by discussing how traders may take advantage of the perceived imbalances among the different regions of the world.  He notes that skew is generally looks fairly valued in Asia, but often there is 0 skew in Asia which results in meaningless numbers.  He compared Asian skew to US skew and noted that it is much higher in US when looking at S&P 500 option pricing.   This results in out of the money puts being a popular hedging tool in Asia, but also results in opportunities to trader cheap Asian volatility versus expensive US volatility.  He finished up noting that trading volatility dislocations is taking the other side of flow which can be a difficult prospect.