Eurex Group
This article first appeared in EQDerivatives' subscription Commentary & News service.
Traders are looking at dynamic spreads between the Cboe Volatility Index and the EURO STOXX 50® Volatility Index, as the VSTOXX® saw its biggest one-day surge this week since the Sept. 11 attacks in 2001.
The spread between the VIX and VSTOXX® increased to 2.05 this week, from the historical level of 0.78 over the last year, according to Cathal Hardiman, institutional trader at IMC in Amsterdam. Increased dislocations and moving spreads provide opportunities for relative value traders – specifically via trading VIX vs. VSTOXX® and VSTOXX® vs. EURO STOXX 50®, Hardiman told EQDerivatives. “With both spreads [as] dynamic [as] we saw this week, there was a record day for volume traded in the Feb and March VSTOXX® Futures, [with] around 300k lots traded on Tuesday,” he said. This is more than double the previous record of 130K, following the French presidential elections in April and May last year.
On Tuesday, a record of 332,000 VSTOXX® futures contracts traded, according to Eurex. This is the biggest one-day surge seen in VSTOXX® since the Sept. 11 attacks in 2001. The VSTOXX® quoted -20 vol points to the VIX overnight when the VSTOXX® was closed. “This is something I have never seen before,” a market participant said.
“This very much looks like a technical selloff rather than a fundamental selloff,” said Arne Staal, head of multi-asset quantitative strategies at Standard Life in Edinburgh. Macro fundamentals remain supportive of risk-on assets and strategies, “But I think we might be transitioning from the very low vol regime that we have been in across equity markets into a higher vol regime, so in that sense I think there is a reset of pricing in risk in the markets,” he said.
Right now, the VIX curve is inverted, the VSTOXX® is also inverted but much less so, Staal said. “The obvious thing that this suggests is VIX or even VSTOXX® steepener type trades, which look very attractive,” he said. This is because the front end will come down over the coming days and weeks, Staal said. Ironically, the best time to sell volatility tends to be after a period of turbulence, he added. “There are also opportunities for RV trades, for example, long the VSTOXX® and short the VIX. Now, VIX levels, especially in the front end of the futures curve are quite a bit higher than VSTOXX® levels, which is very unusual, and I expect the situation to mean-revert,” Staal said. Another way to take advantage of turbulence in volatility markets is to structure option trades on the VIX that will benefit from the extremely high vol-of-vol levels coming down.
Hervé Guyon, equity derivatives flow strategy and solutions at Societe Generale in London, said that the term structure for the VIX/VSTOXX® is exceptional right now. “It is negative and upward sloping which means the Feb VIX is roughly two points above the Feb VSTOXX®, while the April future spread is positive,” he said. Some investors think that the VIX-led selloff will be short lived and therefore shouldn’t impact market confidence. “If you agree with this then you have some interesting trades,” Guyon said. For example, investors could hedge European political troubles such as the Italian election, which people have previously been looking at via call spreads between VIX and VSTOXX®. Now, you can buy 25 strike March calls on VSTOXX® and finance them by selling further out-the-money calls on the VIX, “And this is at zero premium as VIX volatility has spiked significantly and the futures spread is now negative,” Guyon said. If you trade this you need to be confident that the VIX led selloff is over, he added.
 | Georgia Reynolds is a reporter at EMEA at EQDerivatives, based in London. A recent graduate from City University London, Georgia has been studying and producing print and multimedia journalism for five years. |
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