Citigroup is recommending opposing volatility strategies for Asia and Japan, given diverging stock market outlooks. The firm is recommending selling vol in markets such as India and Hong Kong and going long vol for Japan.
"We're reasonably bearish to flat on Asia in terms of fundamentals and more bullish in Japan," said Thomas Gillespie, regional head of equity derivatives strategy in Sydney. The trades follow a global spike in volatility earlier this summer, which have been drifting downward in the region since. For instance, implied volatility in India peaked around 40% a few months back and has steadily headed to the low 30s/high 20s.
The U.S. house suggests selling 6-month implied volatility via a variance swap at 28% on the S&P CNX Nifty stock index in expectation that vols will move lower as the Indian market remains subdued.
On the other hand, Citi believes volatility will move higher in Japan going forward on the back of an anticipated revival of interest in the market. The bank suggests such plays as "long-dated out of the money calls that you can shove into a drawer and keep for a year," noted Gillespie, with calls on the Nikkei 225 or Topix that are 5-10% out of the money. One-year implied vol in Japan is around 18%.
