The pickup in short-dated implied volatility coupled with falling stock markets is providing ideal pricing conditions for short-term equity-linked notes. Most equity structured investments embed call options, so dealers are short volatility when issuing them. More sophisticated investors still bullish on equities are also looking to get in at lower levels which potentially offer more upside.
"Vol of vol is very high at the short end so products with shorter maturities are looking extra hot," explained an equity marketer. "We are definitely trying to be more short-term," said one structured equity head, specifying six-months as the target but noting one-year implied volatility levels are also up. On the flipside, he noted, most retail investors are likely to be put off by headlines focusing on plummeting equity markets, so issuance targeted at these investors may drop off.
