Volatility Normalizes Yet Caution Remains

Weekly Macro Volatility Digest: August 19, 2024

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Within a span of two short weeks, the US equity markets appear to have made a full recovery from the aftermath of the Aug 5^th carry trade unwind. While the VIX® index has retraced to sub-15 – not seen since July 23^rd – there are significant differences beneath the index surface. Whereas ATM SPX® implied vols previously traded at a ~1 vol pt discount to its 1-month realized vol (exponentially weighted), reflecting demand to harvest yield by selling the implied volatility risk premium, SPX implied vols now trade at a +1 vol pt premium to realized vol, indicating a net demand for market optionality by paying the implied VRP. See chart below.
• In a similar vein, current vol-of-vol also trades at a significant premium vs. July 23^rd (VVIX index at 103 now vs. 87 then), signaling heightened uncertainty in the volatility outlook. While VIX put demand surged in the immediate aftermath of the recent vol spike, with the put/call ratio jumping to near a 1-year high, call demand has picked up in recent days as the VIX index has fallen to sub-15.
• Was the recent volatility spike driven in part by an unwind of the dispersion trade? What role does correlation play in a portfolio and how can changing stock correlation dynamics impact broader market volatility? Join me this Thursday 8:30am ET via Zoom for a live discussion and Q&A session with Zed Francis (CIO & Co-Founder of Convexitas) on how to use correlation as a trading signal and risk metric. Pre-registration required here.

The Team is Expanding

I am thrilled to share that my team has expanded with the addition of Ed Tom. Ed joins as a Senior Director on the Derivatives Market Intelligence team with a long career in the industry holding positions at Ellington Management, Credit Suisse, and JP Morgan, to name a few. His knowledge and expertise provide us an incredible opportunity to grow this series with even more fruitful market content.

Beginning next week, Ed will be taking over the Macro Volatility Digest and monthly webinars as I head out on maternity leave for the remainder of the year. Ed and I have worked closely together for over 15 years in various roles so I know you will be in the best of hands until my return.

Volatility Normalizes Yet Caution Remains

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Within a span of two short weeks, the US equity markets appear to have made a full recovery from the aftermath of the Aug 5^th carry trade unwind. While the VIX® index has retraced to sub-15 – not seen since July 23^rd – there are significant differences beneath the index surface. Whereas ATM SPX® implied vols previously traded at a ~1 vol pt discount to its 1-month realized vol (exponentially weighted), reflecting demand to harvest yield by selling the implied volatility risk premium, SPX implied vols now trade at a +1 vol pt premium to realized vol, indicating a net demand for market optionality by paying the implied VRP. See chart below.
• In a similar vein, current vol-of-vol also trades at a significant premium vs. July 23^rd (VVIX index at 103 now vs. 87 then), signaling heightened uncertainty in the volatility outlook. While VIX put demand surged in the immediate aftermath of the recent vol spike, with the put/call ratio jumping to near a 1-year high, call demand has picked up in recent days as the VIX index has fallen to sub-15.
• Was the recent volatility spike driven in part by an unwind of the dispersion trade? What role does correlation play in a portfolio and how can changing stock correlation dynamics impact broader market volatility? Join me this Thursday 8:30am ET via Zoom for a live discussion and Q&A session with Zed Francis (CIO & Co-Founder of Convexitas) on how to use correlation as a trading signal and risk metric. Pre-registration required here.

The Team is Expanding

I am thrilled to share that my team has expanded with the addition of Ed Tom. Ed joins as a Senior Director on the Derivatives Market Intelligence team with a long career in the industry holding positions at Ellington Management, Credit Suisse, and JP Morgan, to name a few. His knowledge and expertise provide us an incredible opportunity to grow this series with even more fruitful market content.

Beginning next week, Ed will be taking over the Macro Volatility Digest and monthly webinars as I head out on maternity leave for the remainder of the year. Ed and I have worked closely together for over 15 years in various roles so I know you will be in the best of hands until my return.

Chart: SPX Vols Now Embed a Positive Implied Volatility Risk Premium

Source: Cboe

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