Volatility continues to climb

THE downward plunge in the Hang Seng index cash trading propelled volatilities to higher levels yesterday for the third day running.

Having wallowed around the 19 to 23 per cent range since September, front-month implied volatility, a measure of derivative investment cost and potential gain, rose another four percentage points yesterday to 29 per cent.

This makes the cost of options relatively more expensive in comparative terms but, given the higher volatility of the cash markets, increases the parameter of potential returns.

Options volume was a high 8,007 lots, compared with 33,961 futures contracts.

During the second half of the year brokers were predicting a significant lift in volatilities in line with previous seasonal trading patterns. However, it had been hoped the increase would be on the back of a significant rise in stocks as opposed to the huge declines seen in the last three days.

The November futures, which recorded a volume of 24,300 contracts, closed at 8,550, down 350 points and at a discount to the cash of about 26 points. December futures, in which 9,650 contracts were traded, closed at 8,560, down 355 points on the day.