Scotland, Other Macro Events Drive Volatility

Terry Flanagan

Global macroeconomic events, especially for options trading, involves analyzing the markets in real time and using that to price options, said David Demray, senior derivatives trader and head of global macro research at Chicago-based AlphaGen Securities.

“That involves interpretation of the supply and demand over the time curve and different option series,” he said. “I’m also keeping track of global macroeconomic events.”

Demray will speak at Markets Media’s Chicago Trading & Investing Summit on Sept. 23.

The Scottish independence referendum is an example of how a global macro event can tilt volatility. According to opinion polls that have been conducted in relation to the referendum, which is to be held on Thursday, the “no” vote was dominant until the end of August 2014, but then the “yes” vote gained momentum and almost pulled even. As of September 15, polls showed the race is very close with a small “no” lead and a very heavy turnout.

“The big headline was that the Scottish referendum went from yes to no by a six-point swing, so pound sterling rallies versus the dollar and U.S. index vol eases back,” said Demray. “That’s not a consistently strong mathematical correlation, but in the near term it’s just something I’ve been watching constantly, to make decisions based on how risky the market movement is and then also planning for future events.”

Demray contrasts the current period of low volatility with that which took place from 2003 to 2007.

“The low vol of ’03 to ’07 is very different than the current low vol,” he said. “In ’03 to ’07, we didn’t know that ’08 was coming. Today, there are several things that are out there that could change things to a high vol environment, but no one knows when those things will happen. For example, if Scotland has a big yes vote on the referendum, then there is this huge question of how much they’ll have to keep in reserve, what currency Scotland would use, how the country’s debt would be treated, etc.”

U.S. stock market volatility also remains low, as it was during the ’03-’07 period. “In ’03 to ’07, it was also low, but globally the financial system was not as interconnected,” Demray said. “Essentially, there was nothing going on. There are many known systemic risks today, but volatility remains low. The overall market for whatever reason, whether it’s QE or not, has remained in this very distinct range.”

AlphaGen Securities provides capital, risk management, accounting, compliance and technology services for all kinds of traders from individual market makers to self-managing trading groups both on and off the floor.

Options trading has become increasingly popular among self-directed traders who, during the current period of low volatility, sell options in order to collect premiums while hedging portfolio risk.

“Especially in this low-vol environment, options have become a democratized product that more and more people are trading in their own brokerage account,” Demray said. “I think these classes and strategies could be used to generate greater returns or cheaper methods of risk reduction. Options can probably be disruptive as an asset class in that no one’s really changed the product, meaning no one’s really come in and changed the idea in customers minds.”

He continued, “Investors know about options and to some extent know what they are on the surface, but that’s the existing paradigm that hasn’t really changed and that’s what’s driven the options market’s process until now. Disruption is not something I do; that is probably more of a sell-side activity. Obviously, from the market-maker and prop trader’s perspective, one always want more people in the market.”

Featured image via iStock

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