Deshpande - Final
Transcript of Deshpande - Final
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Volati li ty ETNs and ETFs27thAnnual Risk Management Conference
Maneesh Deshpande
+1 212 526 2953
[email protected], New York
Rohit Bhatia
+1 212 526 [email protected]
BCI, New York
Ashish Goyal+1 212 526 [email protected]
BCI, New York
February 28, 2011
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 7
EQUITY RESEARCH | Equity Derivatives Strategy
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Increasing Liquidity in VIX Products
Source: Barclays Capital, Bloomberg, OptionMetrics
While in terms of open interest outstanding, SPX continues to dominate
More Vega is being traded in VIX related instruments
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Feb-09 May-09 Aug-09 Nov-09 Feb-10 Jun-10 Sep-10 Dec-10
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Vix Option Vix Futures VIX ETN SPX (RHS)
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Feb-09 May-09 Aug-09 Nov-09 Feb-10 Jun-10 Sep-10 Dec-10
Vix Option Vix Futures VIX ETN SPX
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Roll Cost of VIX Futures/ETNs
Source: Barclays Capital, Bloomberg, OptionMetrics
Monthly roll cost for VXX much higher than VXZ
Volatility term structure is upward sloping during normal times
-40%
-30%
-20%
-10%
0%
10%
20%
Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
VXX VXZ
14%
15%
16%
17%
18%
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20%
0 1 2 3 4 5 6 7
Expiration (Months)
VIXFuture
Roll at maturity Yield for 1M
future
Roll a t maturity Yield for 3M
future
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Roll Cost for Buy and Hold VIX Futures/ETNs
Source: Barclays Capital, Bloomberg, OptionMetrics
And minimal drag for VXZ
Leading to substantial drag in VXX
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Dec-05 May-06 Oct-06 Mar-07 Jul-07 Dec-07 May-08 Oct-08 Feb-09 Jul-09 Dec-09 May-10 Sep-10
VXX ER 1M Fut Rolled at Expiry Const Maturity F1
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Dec-05 May-06 Oct-06 Mar-07 Jul-07 Dec-07 May-08 Oct-08 Feb-09 Jul-09 Dec-09 May-10 Sep-10
VXZ ER 5M Fut Rolled at Expiry Constant Maturity F5
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Source: Barclays Capital.
Variance Swaps (Var Notional=0.5%Equity)
Source: Barclays Capital.
VXX (Notional = 0.25*Equity)
Source: Barclays Capital.
6M ATM Puts (Notional = Equity)
Roll Cost Pays for the Convexity of VIX ETNs
Source: Barclays Capital.
VXZ ( Notional = 0.5*Equity)
-20%
-10%
0%
10%20%
30%
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50%
60%
70%
80%
-60% -40% -20% 0% 20% 40% 60%
SPX 6M Returns
-20%
-10%
0%
10%20%
30%
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-60% -40% -20% 0% 20% 40% 60%
SPX 6M Return
-20%
-10%
0%
10%
20%30%
40%
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-60% -40% -20% 0% 20% 40% 60%
SPX6M
Returns
-20%
-10%
0%
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20%30%
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-60% -40% -20% 0% 20% 40% 60%
SPX 6M Returns
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VIX ETN Hedging Strategies Have Outperformed
Source: Barclays Capital, Bloomberg, OptionMetrics
Performance Metrics 1996-2010
Hedge Type
Average
Return
Standard
Deviation
Sharpe
Ratio
Sortino
Ratio Draw-down
SPTR 8.1% 18.4% 0.24 0.33 -48%
SPTR + 98% 1M SPX Put 2.5% 11.7% -0.10 -0.15 -37%
SPTR + 85% 1Y SPX Put 6.8% 12.2% 0.26 0.38 -36%
SPTR + 85% 1Y SPX Put Costless Collar 6.5% 9.2% 0.31 0.43 -30%
SPTR + 80%-95% 1Y SPX PutSpr Costless Collar 7.5% 11.0% 0.35 0.48 -30%
SPTR + VXZ 10.9% 14.4% 0.51 0.80 -37%
SPTR + VXX 6.2% 13.0% 0.20 0.33 -27%
SPTR + VXZ - VXX 12.3% 16.9% 0.51 0.72 -45%
SPTR + Dynamic VIX ETN Strategy 13.1% 14.2% 0.67 1.14 -31%
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Important Disclosures (continued) Call or put vertical spread writing/writing calls or puts (usually referred to as uncovered writing, combinations or straddles (same expiration month for both
options): The basic risk of effecting a short spread transaction is limited to the difference between the strike prices less the amount received
in premiums.
Call or put calendar spread purchasing (different expiration months & short must expire prior to the long): The basic risk of effecting a long calendar spreadtransaction is limited to the premium paid when the position is established.
Because of the importance of tax considerations to many options transactions, the investor considering options should consult with his/her tax advisor as to howtaxes affect the outcome of contemplated options transactions.
Supporting documents that form the basis of our recommendations are available on request.
The Options Clearing Corporation's publication, "Characteristics and Risks of Standardized Options", is available athttp://www.theocc.com/publications/risks/riskchap1.jsp
Barclays Capital offices involved in the production of equity research:LondonBarclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New YorkBarclays Capital Inc. (BCI, New York)
TokyoBarclays Capital Japan Limited (BCJL, Tokyo)
So PauloBanco Barclays S.A. (BBSA, So Paulo)
Hong KongBarclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
TorontoBarclays Capital Canada Inc. (BCC, Toronto)
JohannesburgAbsa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)
http://www.theocc.com/publications/risks/riskchap1.jsphttp://www.theocc.com/publications/risks/riskchap1.jsp -
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