Institutional investors in Asia are moving to longer-dated volatility plays in the regional markets, after getting burned earlier this year. One equity derivatives marketing head at a bulge bracket firm said end users are now going long volatility for as far out as two to three years, after they lost betting slumping equity volatility would recover on three- to six-month plays. "[Volatility] still hasn't found a floor," he noted, explaining why clients are broadening their horizon for betting on an increase in vol.
Typical plays include equity option straddles and variance swaps, particularly for the Korean market, which is liquid and currently offers attractive pricing. "People feel that we're nearing lows for the next one-to two-year period and there will be a significant expansion from here," said the marketer. To emphasize the fall in volatility he noted 100-day historical vol last year for South Korea's KOSPI index was about 32% whereas now it has fallen to 16.4%.
