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Vol of VolPractical thoughts on trading volatility as a distinct assetclass
Michael FaganChairman
Levitas Capital
8/17/2019 Michael Fagan Slides RMC Asia 2015
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Vol of Vol: 2015 some extraordinary happenings
• In 2015 the events of August represent
an extraordinary example of the ferocity
of vol of vol
• This plot shows the percentage changein implied vol of VIX options against a
change in the term structure of thefutures
• The rise in the implied vol isaccompanied by some of the steepest
observations of the futures curves we’ve
seen since the inception of the product
group
• No other financial product can capture
the velocity of the moves that we have
so far observed
2015
"
8/17/2019 Michael Fagan Slides RMC Asia 2015
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The Volatility Dichotomy
Volatility as a Hedge
• Protect against macro or unforeseenevents
• Allows managers to “stick” to coreholdings
• Positive convexity is comforting
• Extreme situations force abnormalperformance results
• Cost of protection acts as a drag onperformance in good times
• Picking individual volatility winners ischeaper, but difficult for most fundmanagers to achieve
Volatility as anAsset Class
• Agnostic to the noise of the market
• Use statistical analysis of behavioralpatterns in volatility product groups
• Positioning independent of bottom-upanalysis
• Acknowledge the power of volatility overdirection in certain circumstance
• Scale volatility exposure by recognizingthe various tools available to the investor
#
8/17/2019 Michael Fagan Slides RMC Asia 2015
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VIX: The Opportunity of negative correlation
The VIX and its associated derivatives provide the opportunity tocapture negative correlated returns
$% & '()*++
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
-15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00%
VIX Relationships 2008 to 2015
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8/17/2019 Michael Fagan Slides RMC Asia 2015
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Vol of Vol: What does it look like to a trader?
)
•
2008 and we enter into theLehmans phase of the financialcrisis
• What works better? VIX options or
SPX puts?
•
The initial move shows the extreme
reaction of vol of vol to the events,outperforming an equivalent SPXput by a factor of 4
•
Here you can see the way the Vol ofVol (represented here via the VVIX)rising, reflecting the price action we
see in the VIX calls :
> 4 A = 6 7 B 5 < 7 C D E , - . F > D D 6 ; < G = " ' ' H
(Chart utilzes the nearest OTM options; buying second expirymonth holding over 1 calendar month of interest.)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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Vol of Vol: What does it look like to a trader?
*
•
2009 and Central Banks areinjecting capital in response to thecredit crisis
•
Equity markets decline, but VVIX
declines with them
•
Note that the VIX and the VIXFutures remain elevated
• Here you can see the way the SPX
puts now out perform in response tothe one way nature of the S&P500’s movement
, = G 5 < I D > 4 A = 6 7 B 5 < 7 C D E ,
- . F > D D 6 ; < G = " ' ' H
(Chart utilzes the nearest OTM options; buying second expirymonth holding over 1 calendar month of interest.)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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SPX Puts vs VIX Calls – Is there a difference?
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•
J< KD B>4L=76M NJ. G>DD6 >G7 O=4E
B3GC D;L= ,P- Q376R ;(=( =8GD3I;S54
B>4L=7 I;643QT547 5F 7C= W'X 4=G5O=4E N5D 5F
N5D C>I 75 D;Y=R E53 G53DIR E53 C>I 75 74>I= 75
G>Q734= 7C= 537Q=4F54B>
8/17/2019 Michael Fagan Slides RMC Asia 2015
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SPX Puts & VIX Calls – P&L Distribution
\
•
Timing remains key•
Systematic buying of options (SPX puts or VIX calls) is unprofitable
•
Losses for > 90% of the time•
Ave Put Losses = -25% of premium
•
Ave Call Losses = -12% of premium
(Analysis 2007-2015, utilzing the nearest OTM options; buying second expiry month holding over 1 calendar month of interest.)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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Vol of Vol
X
•
VIX options are ultra sensitive to market inflexion points, more so than standard Volinstruments (e.g. SPX puts)
•
The market overpays for insurance for the outlier events because of this sensitivity
(more on that later)
•
Systemic buying of options in itself produces significant drag on the portfolio of ahedger because you’re mostly losing
•
A trading mentality that separates the normal and the abnormal coupled with timing is
a better path
•
Vol of Vol is more tactical than strategic
8/17/2019 Michael Fagan Slides RMC Asia 2015
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8/17/2019 Michael Fagan Slides RMC Asia 2015
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VIX: Using Vol of Vol like an Actuary
•
By using statistical analysis of VIX Cash levels, Implied Vol and Term Structure todetermine option positioning. We believe a successful quantitative strategy is possiblewith an agnostic view of price movement.
•
One would assume that due to VIX Cash mean reversion characteristics, selling VIXwhen it is high would be a successful trade. However, on an Average/StandardDeviation basis, there is no clear trade based purely on the VIX Cash level.
•
Positioning based on the Term Structure alone (which is often when the cash is at itslowest levels) results in double the success based on the Average/Standard Deviationof the VIX Cash level.
•
Combining high VIX Cash and high Term Structure achieves near double again the
Average/Standard Deviation of the Term Structure alone.
VV
8/17/2019 Michael Fagan Slides RMC Asia 2015
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VIX Futures Term Structure Realized Volatility -Hold on at the short end
V"
8/17/2019 Michael Fagan Slides RMC Asia 2015
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VIX Cash & Futures Term Structure: August 2015
V#
VXX
VX1VX2
VX3
0.005.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
0 3 - A u g - 1 5
0 4 - A u g - 1 5
0 5 - A u g - 1 5
0 6 - A u g - 1 5
0 7 - A u g - 1 5
1 0 - A u g - 1 5
1 1 - A u g - 1 5
1 2 - A u g - 1 5
1 3 - A u g - 1 5
1 4 - A u g - 1 5
1 7 - A u g - 1 5
1 8 - A u g - 1 5
1 9 - A u g - 1 5
2 0 - A u g - 1 5
2 1
- A u g - 1 5
2 4 - A u g - 1 5
2 5 - A u g - 1 5
2 6 - A u g
- 1 5
2 7 - A u g - 1 5
2 8 - A u g - 1 5
3 1 - A u g - 1 5
40.00-45.00
35.00-40.00
30.00-35.00
25.00-30.0020.00-25.00
15.00-20.00
10.00-15.00
5.00-10.00
0.00-5.00
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VIX Cash & Futures Term Structure: 08 v 15
V+
0
5
10
15
20
25
30
0 2 - J a n - 1 5
2 2 - J a n - 1 5
1 0 - F e b - 1 5
0 2 - M a r - 1 5
1 9 - M a r - 1 5
0 8 - A p r - 1 5
2 7 - A p r - 1 5
1 4 - M a y - 1 5
0 3 - J u n - 1 5
2 2 - J u n - 1 5
1 0 - J u l - 1 5
2 9 - J u l - 1 5
1
7 - A u g - 1 5
0 3
- S e p - 1 5
2 3 - S e p - 1 5
1 2 - O c t - 1 5
2015
0
1020
30
40
50
60
70
0 2 - J a n - 0 8
2 3 - J a n - 0 8
1 2 - F e b - 0 8
0 4 - M a r - 0 8
2 5 - M a r - 0 8
1 4 - A p r - 0 8
0 2 - M a y - 0 8
2 2 - M a y - 0 8
1 2 - J u n - 0 8
0 2 - J u l - 0 8
2 3 - J u l - 0 8
1
2 - A u g - 0 8
0 2 - S e p - 0 8
2 2
- S e p - 0 8
1 0 - O c t - 0 8
3 0 - O
c t - 0 8
1 9 - N o v - 0 8
1 0 - D e c - 0 8
3 1 - D e c - 0 8
2008
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•
Compare the realized 1M vol of VXX (rolling 30-day VIX futures) with itscorresponding implied vol derived from its option price confirms similar
distribution of risk premium and the same median of 11% with a negative
skew of -1.2.
• Compare the realized 1M vol of SPX with the VIX Index shows a more
centred distribution and lower risk premium of 4% with larger negative skewof -2.3
• The greater risk premium in the VoV is justified by the great
dispersion of daily returns found in underling Vol instrument
compared equity cash.
•
The higher risk premium combined with a lower negativeskew suggests selling vol of vol is superior to selling vol
Vol of Vol vs Vol Risk Premium Distribution
V)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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Returning to our first slide - Vol of Vol: 2008 v.
2015
• Which was a tougher environment forinvestment decisions, Lehmans ‘08 or
2015?
• In 2015 (orange dots) the VIX market
has arguably been more “dangerous”than 2008
•
The three largest moves in vol of vol
measured by the shift in VIX futures
term structure and change in implied volof the options there on, have taken
place this year.
• No other financial product can capture
the velocity of the moves that we have
so far observed
V*
24/10/08 S&P gapped down -8.3% and closed the day down -5.1%.VIX 67.8 VVIX 121 (starting from high vol levels)
24/08/15 S&P gapped down -5.4% and closed the day down -4.1%
VIX 28 VVIX 138 (starting from low vol levels)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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VIX: Options and context
•
VIX options represent the purest form ofleverage to the velocity of market moves
• 2015 was less expected by the markets
than what occurred during 2008 as
volatility was at a much lower absolutelevel
•
The gradient of the line of best fit for 2015is as a series far stepper than that in
2008, indicating a significantly higher levelof “surprise”
• What we saw in August this year was a
release of stored energy as multiple
macro factors shook markets
VH
24/10/08 S&P gapped down -8.3% and closed the day down -5.1%.VIX 67.8 VVIX 121 (starting from high vol levels)
24/08/15 S&P gapped down -5.4% and closed the day down -4.1%VIX 28 VVIX 138 (starting from low vol levels)
8/17/2019 Michael Fagan Slides RMC Asia 2015
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Vol of Vol Summary
! The mean reverting nature of the product means that a long vol of
vol has to be traded
! Vol of Vol is hyper-sensitive to market inflexion points
! Systematic buying of volatility rarely beats selling in the simple
sense of win / loss
V\
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Levitas Capital
About Us:Levitas Capital was founded in 2013 as an Asset Manager and is based in Sydney, Australia. We currently service
clients in Australia, Singapore and Hong Kong. We are leading managers of#
volatility as an asset class witha
#
quantitative#
investment process and advanced risk management models.#
In addition we offer active portfoliosolutions. Interested investors can contact through our website: http://levitascapital.com.au/contact/
Disclaimer:Levitas Capital is the trading name of Volatility Funds Management Pty Ltd (ACN: 165 110 476) that is a CorporateAuthorised Representative (CAR No. 448549) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian
Financial Services Licence (AFSL no. 435746).
#
Any information or advice contained in this presentation is general in nature and has been prepared without takinginto account your objectives, financial situation or needs. All securities and financial products or instruments
transactions involve risks. Please remember that the past performance results are not necessarily indicative of futureresults. Trading derivatives carries a high level of risk to your capital and you should only trade with money you canafford to lose. Trading derivatives may not be suitable for all investors, so please ensure that you fully understand the
risks involved, and seek independent advice if necessary.
VX
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Levitas Capital
[email protected] Level 5, 120 Sussex Street
Sydney NSW Australia
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