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Derivatives

Dealers Push Vol Arb To Money Managers

Equity derivatives sales professionals are recommending money managers start playing the equity volatility markets, an area which has traditionally been the preserve of the sophisticated hedge fund.

Equity derivatives sales professionals are recommending money managers start playing the equity volatility markets, an area which has traditionally been the preserve of the sophisticated hedge fund. The pitch comes in spite of historically low volatility ruling out many vol-based strategies. Sales officials said trading implied volatility against realized vol could boost fund managers' returns, even in stable markets.

Pierre Mendelsohn, managing director in the structured solutions group at Merrill Lynch in London, told investors at a structured retail products conference earlier this month they should look at ways of selling implied volatility and buying historical vol, such as writing covered calls or buying equity tracker notes.

U.S. realized volatility is trading at 9-10%, while the VIX index of U.S. implied vol is around 12.5%-13%, a 25-30% premium.

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