On Monday the CBOE/CME FX British Pound Volatility Index (BPVIX) closed at 22.59, its highest daily close since March 2009, and the BPVIX Index has risen 161.8% so far this year (through June 6). A number of news articles have noted that the implied volatility for British Pound has risen during the past month because of concern about the upcoming June 23 Brexit referendum.
Recent headlines for news stories included (1) “Pound Falls, Volatility Jumps as Polls Show Momentum for Brexit” (Bloomberg on June 5), and (2) “Sterling volatility heads higher as Leave camp builds lead” (Financial Times on June 6).
The BPVIX Index is not tradable and there are no BPVIX listed futures or options. As the vote on Brexit approaches, traders and investors could keep an eye on the volatility skew and term structure for key listed options.
VOLATILITY SKEW FOR KEY OPTIONS
Listed options are available on the CurrencyShares British Pound Sterling Trust (FXB). The FXB delivers exposure to changes in value of the British pound relative to the US dollar. At the end of last month the open interest for the FXB ETF options was 30,874 for the FXB put options, and 8,649 for FXB call options. The next two charts below show the volatility skew for the FXB options at the close on June 6 (when the FXB closed at 141.43). Note that the implied volatility for the out-of-the-money (OTM) FXB put options generally is much higher than the implied volatility for the OTM FXB call options, indicating high investor fear about possible future downside moves of the FXB.
Note in the chart below that the FXB implied volatility for options expiring on July 15 (in yellow color) is higher than the corresponding options expiring in June, Sep, Dec. and Jan. This chart indicates more concern about possible currency volatility immediately after the Brexit vote.
The three charts below show Bloomberg estimates of 30-trading-day impled volatility for seven option classes. Note that for all the options classes (except VIX) in the charts below, the implied volatility at 90% moneyness is higher than the at-the-money (ATM) implied volatility, while the implied volatility for VIX at 110% moneyness is higher than the VIX ATM implied volatility.
CBOE recently launched cash-settled options on FTSE 100 Mini-Index (UKXM), with a notional contract size based on (1/10th) of the FTSE 100 Index.
A valuable tool to see long-term trends in SPX skew and investors’ concerns about catastrophic risk is the CBOE SKEW Index at www.cboe.com/SKEW.
WEEKLY INDEX OPTIONS AND TERM STRUCTURE
CBOE offers SPX Weeklys that expire on Wednesdays and Fridays, and VIX Weeklys that expire on Wednesdays. Weeklys options can provide opportunities for investors to implement more targeted buying, selling or spreading strategies. Weeklys options can help investors efficiently take advantage of market events, such as earnings, government reports, voter elections and referenda, and Fed announcements.
Looking at the S&P 500 implied volatility term structure, a downward hook, or “kink” as the Goldman report says, is noticed just before the June 14-15 Fed meeting. Looking at term structure, markets are pricing in volatility around the June 23rd Brexit vote, but not necessarily the June 14-15 Fed meeting nor the U.S. Presidential election. “Elevated event risk creates “kinks” in term structures,” Gregory and Timcenko wrote. “The term structure of implied volatility is typically smooth and upward sloping. Excess hedging demand around specific expirations creates kinks in the term structure and provides clues as to how event risk is being priced.”
Below are CBOE-created term structure charts with Bloomberg estimates for select dates for OTM SPX puts and VIX calls at certain strike prices. With the Brexit vote scheduled for Thursday, June 23, it will be interesting to see how implied volatility moves around that date for the key index options. You can see the term structure for many more SPX standard expiration dates at www.cboe.com/VIXTerm.
CBOE’s GLOBAL DEVELOPMENTS
Today CBOE Holdings issued a press release in which it announced plans to open its first international business development office in London in July. The office will be headed by Matthew McFarland, director of global client services, and will enable CBOE to increase its presence in the region and allow its business development team to more directly engage with European-based clients and potential new customers, as well as the exchange’s strategic partners.
Here are some of the global developments highlighted in the press release –
EXTENDED HOURS. In March 2015 CBOE introduced extended trading hours for CBOE Volatility Index® (VIX® Index) and S&P 500® Index (SPX) options. The session, which runs from 2:00 a.m. to 8:15 a.m. CT, aligns with the market open in London, making it easier for overseas investors to access and trade CBOE’s premium products. This extended trading session for SPX and VIX options follows the successful implementation of nearly 24-hour trading in VIX futures last year. CBOE began disseminating overnight values of the VIX Index in April 2016. Beginning at 2:15 a.m. CT, VIX Index values are now published every 15 seconds during the extended hours session. www.cboe.com/ETH
- MSCI AND FTSE RUSSELL. CBOE’s recent licensing agreements with MSCI and with London Stock Exchange Group (LSEG) (owner of FTSE Russell indexes) to be the sole U.S. provider of options on major MSCI and FTSE Russell indexes have brought a significant international dimension to CBOE’s index options franchise.
- CURVEGLOBAL. In October 2015, CBOE, LSEG and major dealer banks formed CurveGlobal, a new interest rate venue that will trade on the LSE Derivatives Market and clear through LCH.Clearnet. CurveGlobal is expected to launch in 2016 with trading in futures based on major European interest rates.
- RMC EUROPE. CBOE will host its fifth annual CBOE RMC Europe on September 26 – 28, 2016, in Ireland www.cboermceurope.com.