The Merrill Option Volatility Estimate, or MOVE Index, measures swings based on one-month options for two to 30-year Treasuries and last month reached the lowest since before the Nov. 8 U.S. elections. It has since rebounded to about its one-year average.
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These latest moves don’t necessarily mean volatility sellers will be squeezed out of the market. For equity-fund managers, one strategy for selling volatility that’s growing in popularity isn’t as much about betting on the direction of the market as much as it is about generating income, according to Pravit Chintawongvanich, head of derivatives strategy of Macro Risk Advisors.
And since they’re not necessarily betting on the direction of the CBOE Volatility Index, known as the VIX, they aren’t required to cover their position if volatility spikes, and may choose to continue selling the options. While sellers of volatility typically actively hedge their position with stocks, the income-driven strategy has grown among pension funds and traditional asset managers, according to Chintawongvanich.
“They harness volatility in a different way,” he said by phone. “I think the reason is because yields are super low and people have been saying for years equities are fully valued. So if you believe that, you’re not giving away too much upside.”
Still, Chintawongvanich understands the appeal of betting on rising volatility. After all, there’s still the chance that anti-euro candidate Marine Le Pen wins the French presidential election, and the emergence of Jean-Luc Melenchon as a fourth viable candidate could alter the race. That’s on top of geopolitical tension between the U.S. and North Korea, Russia and Syria.
“Vol has been bid over the past couple of days because of the French election -- the U.S. was not pricing in any event premium,” Chintawongvanich said. “It’s an event that most likely will end up being fine, but there’s a very small risk of a very bad outcome.”
This article was provided by Bloomberg News.