VOLATILITY Q&A: Jim Strugger, MKM Partners
Traders Magazine Online News, January 31, 2013
Jim Strugger is a managing director and equity derivatives strategist at MKM Partners, an 11-year-old agency brokerage based in Connecticut. He joined MKM in August 2009, following a two-year stint in a similar role at derivatives powerhouse SG Americas. Before that he was a derivatives salesperson at Susquehanna Financial Group for nearly two years.
At MKM, Strugger produces a Morning Derivatives report and has spoken on volatility frequently over the years, at industry conferences, in the media and in his report.
Traders Magazine checked in with Strugger to find out where he believes markets are in the volatility cycle and what that means for the future of derivatives products based on the Chicago Board Options Exchange’s Volatility Index, aka VIX.
The VIX reached a high of 79.13 in October 2008, at the peak of the financial crisis. It has traded as low as 12.30 this month.
Volume in VIX options and futures contracts has soared in the past three years. Last year, average daily volume in VIX futures reached 95,000 contracts, up from 5,000 in 2009. Average daily volume in VIX options reached 443,000 contracts, up from 132,000 in 2009.
Traders: Who uses VIX products? Hedge funds mainly?
Strugger: I think the answer is “everybody.” And its not just VIX futures and options on VIX futures. It’s also the many volatility-linked exchange-traded products that popped up over the last few years. These, in and of themselves, have driven volume higher in the VIX contracts.
Traders: Why the big uptake in the past three years?
Strugger: It happened because we just came through the highest volatility period since the 1930s. People got sucked into volatility for all the right reasons. It offers convexity. [“Convexity” in options refers to the gamma of the option, or how volatile an option is relative to movements in the underlying asset.] That’s the attractiveness. The best trade I’ve ever seen was made by anyone who was long VIX calls in the fall of 2008. It was a quick, simple little 100-bagger in some cases that obviously sucked people in. Since then, volatility has morphed over time to become its own asset class.
Traders: I gather that volatility is cyclical.
Strugger: Right. These volatility cycles have lasted, on average, about five-and-a-half years over last 30 years. And we just hit the five-and-a-half year mark.
Traders: So, we’re at the end?
Strugger: There is a relationship of volatility to underlying economic cycles.
So, for a long time, I made the argument that this cycle would last longer than five-and-a-half years. So, I thought it could potentially end later in 2013. But what has happened is that the market has told us that it is probably over and I’m not going to stand here and get run over by the market when all the indicators I look at are screaming lower vol, lower correlation, higher dispersion, lower skew, lower vol of vol. All my favorite indicators hit the point where this might really be over.
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