How are warrants tracking the Nikkei225 and US stock indices impacted by the jump in volatility

▪️ Speculation about a looming US recession, an unwinding of artificial intelligence euphoria, and a surging yen that led to an unwind of carry trades has led to a three-day selling spree across global equity markets. Particularly, yesterday’s -12.4% drop in the Nikkei225 not only erased all year to date gains for the index, but it was also the worst day for the Nikkei 225 since 1987’s “Black Monday”. Meanwhile, the Dow and S&P500 last night registered their biggest losses since September 2022.

▪️ Volatility levels on the exchange traded options market for Nikkei225 and US indices spiked no less than 4%. The VIX – a measure of S&P options listed on the CBOE – jumped to its highest since 2020."

▪️ On the back of this jump in volatility, Macquarie has raised the implied volatility (IV) levels of warrants tracking the Nikkei225 and US indices since yesterday. In warrants, an increase in IV leads to an increase in warrant prices. Consequently, warrants tracking index warrants in particular have seen large increases in implied volatility.

▪️ Spreads are also widened during volatile markets as huge price swings in the underlying can cause the warrant deltas to change dramatically in a short space of time as the warrants move very quickly from in-the-money to out-of-the-money and vice versa. When this happens, you would notice that the offer spreads of warrants have been widened to discourage investors from buying these warrants.