Derivatives strategists at Deutsche Bank anticipate that rapid changes in implied and realised volatility will continue to create opportunities in VIX, VXX and other volatility products this year, as in 2014.
“VXX downside trades will have opportunities to be profitable in 2015, but active management will be essential, and using options to limit downside risk will mitigate the risk of vol spikes,” wrote the Deutsche Bank strategists in a client note. “High entry points will be key, and the put vs put spread decision should come down to levels of implied vol (with vol-of-vol currently quite high, put spreads are more timely than puts).”
The strategists added that with uncertainty around the timing of any monetary policy change by the US Federal Reserve, in addition to global growth scares amid fragile emerging markets, the firm anticipates spikes in volatility to be more frequent and larger in 2015, leading to moderately higher levels of implied and realised volatility throughout 2015.
Deutsche also noted that with S&P 500 realised vol showing little hesitation to briefly visit historic lows, put options on realised variance will be a key tool for selling volatility after any potential volatility spikes in 2015.
“Following 2014’s volatility spikes, realised vol often hit historic lows much faster than implied vol reset lower. As a result, targeting realised vol via put options on variance can be more reactive to post-spike normalisation than VIX or VXX puts, which are best saved up for slightly later in the vol spike cycle.”
During afternoon New York trading on Tuesday, January 6, the VXX sat at 34.39.
