Eurex Exchange | Eurex Group
The year ahead will be one of politically driven volatility for the EURO STOXX 50 Volatility Index, while making the benchmark tradeable in the U.S. will also prove positive for its liquidity, according to strategists.
VSTOXX options will soon be tradeable in the U.S., following the U.S. Commodity Futures Trading Commission’s approval late last year. Only qualified institutional buyers have been allowed to trade VSTOXX options in the past, following a no action letter from the U.S. Securities and Exchange Commission.
Gabriel Manceau, VSTOXX trader at Morgan Stanley in London, said bringing the VSTOXX to U.S. investors could potentially more than double the current number of investors participating in the VSTOXX market, which will drive liquidity. “With the two macro areas, U.S. and Eurozone, taking different paths, there may be more decorrelation coming this year between VIX and the VSTOXX,” he said. “U.S. investors should be interested in diversifying their strategies using VSTOXX, especially if they hold exposure to the Eurozone. If this interest realizes, we expect to see tighter prices and higher volumes but also higher intraday volatility of the futures, offering even more opportunities.”
Manceau said the VSTOXX will be a focal point around a number of macro political events this year. “We are already seeing a volatility spike in the VSTOXX curve for the French presidential election in April,” he added.
From the refugee crisis to the rise in terrorism, Europe’s far-right political parties have been making gains in the polls. A number of key European countries will hold general elections this year, including France, the Netherlands and Germany. All three countries have seen increased support for far-right, Eurosceptic political parties.
Antoine Porcheret, Equity & Derivative Strategist at BNP Paribas in London, said the main focus when it comes to volatility now is the extreme steepness of the term structure. “We ended 2016 and start 2017 with a term structure of volatility deep in contango,” he said. “This was driven by the collapse in short-term implied volatility while the longer term remained resilient.” Focusing on the VSTOXX specifically, the steepness is exacerbated by the April 2017 bump, which is exaggerated, according to Porcheret. “French national and German regional elections make April-May forward volatility richer. But I think April futures are overpriced compared to February, covering the March period that includes the Dutch general election”
Porcheret sees two ways of positioning tactically. Either via VSTOXX futures spreads, selling April and buying February, or via VSTOXX ratio put spreads. “You want to buy a slightly out-the-money put to capture the negative roll down of the term structure, but the absolute level of the VSTOXX makes that not really compelling. Therefore, you can sell two or three times further OTM puts to be long delta with a low breakeven.”
“We are already seeing a lot of activity on VSTOXX options and VSTOXX generally… between March and June, which surrounds the French election,” said Kokou Agbo-Bloua, global head of flow strategy and solutions in financial engineering at Société Générale in London. “Looking at the volatility term structure there is a clear hump on the curve, which is clearly pricing a higher expected volatility around the French election.”
Manceau added investors are focused on April futures in order to buy the implied volatility event in front of the French general election, “If there is a demand of implied volatility before the election, that would be in April and it would trigger buying demand for the April future.” VSTOXX traders are anticipating this and the April future is currently trading rich with a premium compared to March or May future, he added.
Jamie Cassidy, head of index options Europe at SIG Susquehanna in Dublin, noted customers are buying out-of-the-money options before these events in the VSTOXX. Reflecting on the Italian referendum, a notable trade that was seen in the VSTOXX ahead of the vote was a buyer of 20,000 contracts in Dec 17 strike puts, paying 12.5c. “In retrospect, this looks a good trade as even with the ‘No’ result being the bearish outcome, volatility came in and with the index settling to 14.48 on Dec. expiry these puts were worth 2.52 [i.e. 17 – 14.48 = 2.52] at expiration.”
 | 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. |
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