03 Nov 2016
Eurex Exchange
VSTOXX Term Structures At Three Year Highs, Despite Macro Risks
Despite near term macro risks, such at the Italian constitutional referendum and the upcoming French election, EURO STOXX 50 Volatility futures term structure is the steepest it has been in over three years, prompting an increase in VSTOXX futures and options trades.
Should volatility rise over the next week, strategists at Deutsche Bank in London think the VSTOXX Jan. 2017 expiry could rise more than twice the increase in the already elevated April 2017 contract. The difference in implied volatility between VSTOXX Jan. 2017 expiry and April 2017 is greater than three volatility pointsand gives investors the opportunity to benefit from an increase in near dated volatility, but without the usual carry costs of long volatility positions, according to the strategists.
The Italian referendum on December 4 will see Italians vote on plans to reduce the size and powers of the Italian Senate to keep in line with E.U. standards. Elsewhere, the French presidential elections will be conducted in two stages with the first taking place on April 23 next year. The second round, a fortnight later, is a runoff between the two candidates with the most votes. Both elections have the potential to fundamentally change the nature of the E.U. VSTOXX market makers have seen larger trades recently, with 36,200 futures and 55,454 puts changing hands Tuesday. Jamie Cassidy, head of index options Europe at SIG Susquehanna International Group in Dublin, said the main trade yesterday in the VSTOXX was a buyer of 20,000 17 strike puts for 12.5c. He added another 8,000 traded Wednesday at the same level. “Notable given the VSTOXX futures were 2% lower at the time of the 2nd trade. Currently Dec. straddle for the VSTOXX is 3.30 or 15.7%,” Cassidy said.
Colin Bennett, strategist at Deutsche Bank in London, explainedthe trade is very topical right now because everyone has been looking at what is the best way to play volatility over the referendum. With the French election, there are concerns that there is potentially going to be an outcome that will cause greater volatility, he said.
Bennett is specifically recommending going long Jan-17 futures vs. short 2x Apr-17 futures, as near-dated implied volatility has a higher beta to the overall level of volatility, than far-dated implied volatility. “The reason of shorting 2x Apr-17 against each 1x Jan-17 bought, is that you would find its near-dated end of volatility tends to move around more” should be “The reason of shorting 2x Apr-17 against each 1x Jan-17 bought, is that you may find the near-dated end of volatility tends to move around more,” he told EQDerivatives. “So, [therefore] it may be appropriate only go long one of the near term, and short two of the far term.”
Five month – two month term structure of over three has only been seen 15 times since 2010, and the trade is profitable 80% of the time, he added. In addition to being profitable, on average the risk reward is attractive with the maximum 8.7 profit being 5.4x the max 1.6 loss, he said.While this term structure has not been above 3pts for over three years, Bennett added that it rose above it on November 18. This is why that now could be statistically a good time to put on the trade, he noted in his latest report.
 | Georgia Reynolds is a reporter, EMEA, at EQDerivatives, based in London. In her role, Georgia covers vanilla futures and options flow across single stocks, indices, dividends and ETFs across Europe. On the buyside, she focuses on EMEA flow strategies, new fund launches and risk premia investing. Georgia also covers European regulation surrounding MiFID II, EMIR, PRIIPs, TLAC and capital requirements. A recent graduate from City University London, Georgia has been studying and producing print and multimedia journalism for five years. Georgia can be reached at +44 203 865 0987 or reynolds@eqderivatives.com. |
