To answer that question first I have to describe the risks. For this case I will use the Credit Default Swaps (CDS) Spreads and Implied Volatility in option prices to help me. These two derivative markets reflected the story very well in 2008 and 2009. There is too much information for any person to watch all at one time, even using multiple screens. I wanted to create a market view to show many risk factors at once. Since the Greek debt crisis becomes an on again/off again headline, I was curious to see how that is effecting the optionable universe of names I follow. For my sample I will proxy Credit Risk by the Percent Change in 5 year CDS Par Spread. If the market sees more credit risk those spreads go up. If the market sees less credit risk, those spreads go down.
This View looks at Percent Change in 5 Year CDS Par Spread, and the difference between 12 Month Implied Volatility 6 months ago and today. What these different data points create is the scene 6 months ago (prior to Greece in the post Meltdown recovery) and right now. The risk, measured by 5 Year CDS Par spreads, is going up in the lower volatility names in the Equity Universe that trade listed options. Those lower volatility names (short red/purple buildings in the front) are the more Blue Chip companies- I highlighted DELL, HPQ CSCO, IBM and MO. The higher volatility names (taller, green buildings in the back) are showing marked declines in risk. There looks to be two faces, one for lower volatility companies and one for higher volatility companies.
In General:
- CDS spreads for less volatile stocks have gone up in the last 6 months.
- CDS spreads for the more volatile stocks have come down.
The ongoing Greek situation (remember 1998?) seems to be spilling over to the quality end of the corporate credit risk market. Traders are assigning more risk in the higher quality names of the CDS market even when the implied volatility in the equity market is steadily driven down.
It takes only a few minutes to construct these views in AlphaVision (I could not do this in a spreadsheet). Data provided by Bloomberg. www.aqumin.com
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