SVOL - Are Option Income Funds Suppressing Volatility?
2024-03-14 07:00:00 ET
Summary
- Equity volatility has fallen significantly over the past year, with the VIX index declining from an average of 26 in 2022 to just 17 in 2023.
- The diversity in underlying, tenor, and strike selection means the overall impact on the volatility surface is likely to be quite diluted vs. if these funds were all acting as a monolith.
- If buy-write strategies were distorting the market, we should see very low levels of call skew as selling pressure on OTM calls depresses their volatility relative to ATM options.
By Mandy Xu
What's Behind the Low VIX® Index Level?
Equity volatility has fallen significantly over the past year, with the VIX index declining from an average of 26 in 2022 to just 17 in 2023. The 9 pt year-over-year decline ranks as the 3rd largest annual drop in equity volatility on record, behind only 2010 (post-GFC) and 2021 (post-Covid). So far, 2024 looks to be much of the same, with the VIX index averaging just 13.5 YTD, well below levels we saw even pre-pandemic....
Are Option Income Funds Suppressing Volatility?