In some of our posts from late last year, we discussed the comparison between the forward volatility as expressed by the CBOE's VIX Index and our daily forecasts of the volatility of the S&P 500 Share Index.
As can be seen from the above chart, the positive offset between the VIX Index and our GARCH forecast of volatility, after reversing pro articulus — indicating that the strategy of selling options on the S&P 500 Index and delta hedging them from an accurate volatility model would not be profitable — has recovered to its historical level, and now, sec. articulus, is richer than it was in recent history.
To the eye, this appears coincident, as we have discussed, with the recovery in profitability for hedge funds and trading firms, who's dynamic trading activityis mathematically equivalent to delta hedging synthetic options written on a risk factor and sold to their investors. We will follow up this chart with a more rigourous analysis, now that we are apparently back in the prior region of phase space.