Volatility in the Crosshairs

  • 11 Aug 2017
  • By Dave Lerman and CME Group
  • Topics: Equity Index

Hedge Funds Poaching Profits with Low VOL Strategies


With the instability of the new White House administration, North Korea launching missiles all over the Pacific Ocean and an unsettled global economic picture, you would think market participants are enjoying substantial volatility in all markets. The opposite, however, seems to be true.  Volatility is near historic lows in the U.S. stock market.  Moreover, the lack of volatility is not confined to equities—it has spread across asset classes to gold, treasuries, and crude oil as measured by WTI.   

Figure 1 below shows volatility percentile rankings for some major options on futures contracts. Take, for example, E-mini S&P 500 futures options. At the Money (ATM) volatility is currently 7.57%. This “ranks” it in the third percentile…i.e., volatility is higher 97% of the time.  Low volatility usually brings low options premiums. Higher volatility generally translates into higher premiums.

Therefore, these historically low volatility levels allow traders to purchase options or enter long option strategies at levels we have not seen since the early 1990s. Rarely do we see options premiums this low. Options on Gold futures and Treasury futures also are in single-digit percentile rankings, offering hedge fund portfolio managers exceptionally cheap long options opportunities.

Figure 1:

Cheap vs. Expensive Premium

Volatility Percentile Rankings
Various CME Group Products

3-years ending 7/27/2017
Percentile Ranking E-mini S&P 500 Crude Oil Euro FX US Treasury Notes Gold
High 35.72 78.94 13.87 9.20 23.26
90th percentile 18.12 52.06 12.07 5.94 18.21
75th percentile 15.06 44.22 11.02 5.53 16.33
50th percentile 12.98 36.76 9.63 5.00 14.75
25th percentile 11.15 29.31 8.44 4.71 13.07
10th percentile 9.50 24.74 7.38 4.35 11.34
Current Volatility as of 7/27/2017 7.57 28.85 8.33 3.90 10.49
Current %tile Rank as of 7/27/2017 3%tile 23%tile 24%tile 4%tile 8%tile
Cheap/expensive Very cheap Cheap Cheap Very cheap Very cheap

Source: CME Internal Database


Hedge fund high volatility strategy managers can enjoy several benefits to trading equity index options on futures:

  • 24-hour trading: Hedge fund PMs/traders can manage risk and initiate or offset positions around the clock, and liquidity is excellent as well. The evening after the BREXIT vote saw 475,0001 options trade in CME Group markets. The night of the U.S. elections saw 655,0002 options trade overnight.  When markets move, you can transact after hours with confidence.
  • Capital efficiency: Capital is precious, and traders with futures and options positions can enjoy a potential margin reduction of 69-72 percent3 depending on the position.
  • Exceptional volume/OI growth: Average daily volume on the E-mini S&P 500 options on futures alone has grown from 125,000 contracts a day in 2012 to 575,000 a day in 2017—a growth rate of 27% per annum4.  Figure 2 below illustrates how investors continue to make CME Group their preferred choice for equity options on futures.
  • Extensive range of expiration choices. From quarterlies to weeklies to Wednesday and Monday expirations, hedge fund PMs can fine tune options strategies. European and American style expirations are also available.
  • Seamless delta transition. Options on futures expire into a futures contract — allowing you to establish a continuous position in the market should you choose to exercise. Cash equity index options cash settle, and therefore require re-establishment of positions after expiration.

Figure 2:

Source: CME Internal Database

Impact on Strategies

Figure 3 below shows the significant impact of volatiltiy on options premiums. If volatlity were to advance from current from the historic lows we are witnessing now and revert back to only the 50th percentile…..the ATM straddle would increase dramatically from $2,190 to $4,100 (assuming all other options inputs remain the same) 

Figure 3:

E-mini S&P 500 Volatility Percentile Rankings Impact on Strategies

3-years ending 7/27/2017
Percentile Ranking ATM Impl. Vol Level ATM Straddle* in premium terms ATM Straddle* in dollar terms
High 35.72% 237.6 $11,880
90th percentile 18.12% 117.2 $5,860
75th percentile 15.06% 96.2 $4,810
50th percentile 12.98% 82.0 $4,100
25th percentile 11.15% 69.6 $3,480
10th percentile 9.50% 58.2 $2,910
Low 7.38% 43.8 $2,190

*ATM straddle is S&P 500
2475 straddle, Sept 17 exp.

Source: CME Internal Database

Visit cmegroup.com/equityoptions to learn more about our product offering and access tools such as:

  • QuikStrike Options Tool, with powerful analytics, vol term structure, active strikes and more.
  • Daily Options Reports, including trade recaps and spread activity
  • CME Institute access, with in-depth courses, seminars and more at myfuturesinstitute.com

1 Source: CME Internal Database

2 Source: CME Internal Database

3 Source: CME Internal Database

4 Source: CME Internal Database


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Dave Lerman, a CME Group employee for 32 years, has played a key role in numerous product launches, including Bitcoin, the E-mini S&P 500, the Micro E-mini, and the E-mini Russell. He has traveled the globe giving seminars and workshops on trading and risk management, and is the author of Exchange Traded Funds and E-mini Stock Index Futures.

Prior to joining CME Group, Dave was a member at the CBOT. He was a senior Portfolio Manager at Zavanelli Portfolio Research, taught investment management at Harper College and has lectured at the Northwestern University Kellogg Graduate School of Management.

About CME Group

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