Big Picture Trends in the

Option Market
June 11th, 2009
Implied Volatility and Index Option Volume

VIX Spot vs. Broad Market Option Volume

90 22%
VIX (left)
80 SPY + SPX Option Volume as a % of Total (right) 20%

70 18%

60 16%

50 14%

40 12%

30 10%

20 8%

10 6%
Source: MRA, Bloomberg
0 4%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

www.macroriskadvisors.com
Heightened Correlation

SPX 30 Day Realized Correlation: Top 50 Names

90%

80%

70%

60%

50%

40%

30%

20%

10%
Source: MRA, Bloomberg
0%
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

www.macroriskadvisors.com
Measures of Volatility Move Together

EM 1 YR
VIX IBOX MOVE V2X CVIX TBILL SPX Call/Put
Credit Breakeven
VIX 100% 61% 24% 56% 50% 54% -45% -31% -85% -1%
IBOX 100% 31% 46% 38% 62% -48% -29% -68% 11%
MOVE 100% 25% 23% 31% -22% -15% -21% -8%
V2X 100% 58% 62% -24% -33% -37% -8%
CVIX 100% 52% -34% -25% -41% 2%
EM Credit 100% -35% -43% -51% 0%
TBILL 100% 23% 51% 5%
1 YR Breakeven 100% 26% 1%
SPX 100% -1%
Call/Put 100%
Source: MRA, Bloomberg

www.macroriskadvisors.com
Realized Volatility in 2006

S&P 500 Economic Sectors: 1 Year Realized Volatility in 2006

100%
Source: MRA, Bloomberg
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

www.macroriskadvisors.com
Realized Volatility Today

S&P 500 Economic Sectors: 1 Year Realized Volatility

100%
Source: MRA, Bloomberg
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

www.macroriskadvisors.com
Financials Become the Focus…

XLF Daily Option Volume

1,000
Thousands
21 Day Moving Average

800

600

400

200

Source: MRA, Bloomberg

0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

www.macroriskadvisors.com
…as Volatility Increases

XLF 30 Day Realized Volatility

140

120

100

80

60

40

20

0 Source: MRA, Bloomberg

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

www.macroriskadvisors.com
Confidence in Financials?

2 Month Realized Volatility Ratio: Financials / Non-Financials

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5
Source: MRA, Bloomberg
0.0
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

www.macroriskadvisors.com
The VIX as a Hedging Tool

VIX Daily Option Volume

200,000
21 Day Moving Average
180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000
Source: MRA, Bloomberg
0
Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

www.macroriskadvisors.com
VIX Risk Premium

VIX Minus Subsequent SPX 21 Day Realized Volatility

40

30

20

10

-10

-20

-30

-40
Source: MRA, Bloomberg
-50
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

www.macroriskadvisors.com
The Volatility Carry Trade Gone Wrong

Aggregate P/L of Selling One Month SPX Variance Since 2007

10
Millions

-5 Aggregate P/L ($mln) of selling

10K vega of one month SPX
Variance each day struck at the
-10 closing VIX level

-15

Source: Bloomberg, MRA

-20
Jan-07 May-07 Sep-07 Jan-08 Jun-08 Oct-08 Feb-09

www.macroriskadvisors.com
Flat Volatility Termstructure at Elevated Levels

SPX At-the-Money Volatility Termstructure

80
10-Jun-09
70 20-Nov-08
10-Jun-08
60 10-Jun-06

50

40

30

20

10
Source: MRA, Bloomberg
0
1M 2M 3M 6M 1Y 1.5Y 2Y

www.macroriskadvisors.com
Citigroup Conversions Drive Volume

Citigroup Daily Option Volume

1,800
Thousands
21 Day Moving Average

1,600

1,400

1,200

1,000

800

600

400

200
Source: MRA, Bloomberg

0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

www.macroriskadvisors.com
Citigroup Combos Implied Borrow Costs up to 100%

Citigroup June 5 Combo Price Over Parity

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10
Source: MRA, Bloomberg
0.00
27-Feb 27-Mar 27-Apr 27-May

www.macroriskadvisors.com
Increase in Commodity ETF Option Trading…

USO (Oil ETF) Daily Option Volume

21 Day Moving Average
140,000

120,000

100,000

80,000

60,000

40,000

20,000

Source: MRA, Bloomberg

0
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09

www.macroriskadvisors.com
Gold…

GLD Daily Option Volume

200,000
21 Day Moving Average

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000
Source: MRA, Bloomberg
0
Jul-08 Oct-08 Jan-09 Apr-09

www.macroriskadvisors.com
Natural Gas…

UNG Daily Option Volume

100,000
21 Day Moving Average
90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000
Source: MRA, Bloomberg
10,000

0
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

www.macroriskadvisors.com
The Option Market is Still Open For Business

Equity and Index Daily Option Volume

20
Millions
21 Day Moving Average
18

16

14

12

10

2
Source: MRA, Bloomberg
0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

www.macroriskadvisors.com
Things That Make You Go Hmmm…

5Yr US Sovereign CDS vs. 5 Yr Investment Grade CDS

240 70
IG (left)
220 US (right)
60
200
50
180

160 40

140
30
120
20
100
Source: MRA, Bloomberg
80 10
1-Apr 11-Apr 21-Apr 1-May 11-May 21-May 31-May 10-Jun

www.macroriskadvisors.com