Volatility is back!
April 23, 2024
Nilesh Jethwa
CEO of Marex Solutions
Volatility is back!
So what?!
Some of you will have seen my post, Is This Time Different?, about the unusually low implied volatility earlier this year. I, and many of our clients, felt the market was offering a rare opportunity to buy downside protection for equity portfolios. Indeed, the VIX was around 13% then; it’s around 19% now.
Ok, so what’s the next move? Will vol move higher from here? Nobody knows. But I can tell you that the cost of insurance is much higher now, shifting the opportunity set from buying protection to selling it.
This is exactly what we’re seeing investors do on structured product desks, with growing interest in conservative yield enhancement products like autocallables.
Yield enhancement products are a fancy name for selling out-of-the-money puts in order to get a higher coupon on your cash. Since selling puts can be risky, they are often structured with downside knock-in barriers or buffers which stop the put hurting you unless the market falls by a significant amount (typically 30-40%).
The products are tailored to meet your upside needs with a downside exposure you’re happy with and the yield you can earn is higher when volatility is higher – like now.
Timing, like much of life, is everything. The best time to enter these products is when markets sell off and implied volatility is elevated. I have no special gifts of insights or prediction – my kids would be even less generous. But I have seen many volatility cycles before, and this one looks very familiar.
See the graph below.
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