EQUITY DERIVATIVES STRATEGY

Market Commentary
December 3, 2010

Derivatives Strategy
Using the VIX as an Asset
Equity Derivatives Strategy

It is a common view that equity implied volatility is Exhibit 1: VIX and S&P 500 are Negatively Correlated.
merely a theoretical idea that was used mostly in option 70 1600
pricing and risk management. However, recent S&P 500 1500
developments in market products have completely 60
1400
changed the equity volatility landscape. It is now
1300
possible to use volatility as a standalone strategy. Here 50
1200
are some examples:

S&P 500
VIX
40 1100

o Directional Strategies: Investors can express 1000

30
short- and medium-term directional views in 900

volatility. This can, for example, be strategies 20

800

complimentary to equities or strategies based on VIX

700

future volatility estimation. 10 600

1997 1999 2001 2003 2005 2007 2009
o Hedging Solutions: The explicit negative
relationship between volatility and equities,
particularly in the extreme case, makes volatility Exhibit 2: VIX Depends On Volatility Demand and Supply
a suitable candidate for protection against
market decline or tail risk events.
o Volatility Strategies: In a number of scenarios
including volatility arbitrage, dispersion and
correlation trades, VIX products can be the
easiest way to properly adjust volatility exposure
to desired levels.
o Portfolio Management: Portfolio managers
may use VIX products to better control stock
correlation in different volatility regimes.
The negative correlation between the VIX and S&P
500 is a key fundamental fact in understanding and
building volatility strategies. The nature of this
relationship is not symmetric though (Exhibit 2). In times
of equity market decline, strong demand for option
hedging strategies leads to strong demand for volatility,
which typically translates into significant increase in the
VIX Index. On the contrary, when the equity market
goes up, overwriting strategies (selling covered calls)
become popular which create an excess supply of Exhibit 3: VIX is Weakly Correlated to Many Asset Classes.
volatility that causes VIX to decline moderately.
VIX Equity Credit Commodity FX Rates
The VIX is an ideal candidate for portfolio mangers who VIX -0.68 0.53 -0.15 -0.14 0.13
Equity -0.68 -0.58 0.11 0.12 -0.18
are looking for alternative investment vehicles, because Credit 0.53 -0.58 -0.03 -0.20 0.33
the VIX is only weakly correlated to many major Commodity -0.15 0.11 -0.03 0.15 -0.02
FX -0.14 0.12 -0.20 0.15 0.23
asset classes including Commodities, Foreign Rates 0.13 -0.18 0.33 -0.02 0.23
Exchange (FX) and Interest Rates (Exhibit 3). The Note: Correlations is based on monthly returns over the past 20 years.
negative correlation of VIX to Equities explains positive
Source: Credit Suisse Derivatives Strategy
correlation to Credit Instruments.

Edward K. Tom Terry Wilson Dmitry Novikov* Mandy Xu

ed.tom@credit-suisse.com terry.wilson@credit-suisse.com dmitry.novikov@credit-suisse.com mandy.xu@credit-suisse.com
(212) 325 3584 (212) 325 4511 (212) 325 0714 (212) 325 9628

* primary author
(212
(
 EQUITY DERIVATIVES STRATEGY

Contacts
Credit Suisse Equity Derivatives Strategy and Structuring

Grace Koo Edward K. Tom Chan Ahn

Head, Equity Product Strategies Head, Equity Derivatives Strategy Head, Equity Derivatives Structuring
+1 212 325 4755 +1 212 325 3584 +1 212 325 4510
grace.koo@credit-suisse.com ed.tom@credit-suisse.com chan.ahn@credit-suisse.com

Credit Suisse Derivatives Sales

Tim Scanlon Michael Clark

Head, Equity Derivatives Sales Head, Structured Retail Products
+1 212 325 4755 +1 212 325 5909
tim.scanlon@credit-suisse.com michael.g.clark@credit-suisse.com

Credit Suisse Derivatives Trading

James Masserio Robert Sowler

Co-Head, Equity Derivatives Trading Co-Head, Equity Derivatives Trading
+1 212 325 5988 +1 212 325 7281
james.masserio@credit-suisse.com robert.sowler@credit-suisse.com

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