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Trading European volatility with Eurex VSTOXX® Derivatives

Release date: 24 Oct 2013 | Eurex Exchange

Trading European volatility with Eurex VSTOXX® Derivatives

Volatility is a measure of the level of uncertainty prevailing in the market. Unexpected economic releases, geopolitical turmoil, or the ongoing global financial crisis are just a few of the underlying causes of market turbulence.

Derivatives market participants have discovered that with such a measure, they can derive a new asset class from the existing stock market and trade it. Eurex Exchange, being one of the leading derivatives exchanges worldwide, has answered this demand with volatility derivatives based on the VSTOXX volatility index, to increase equity portfolio diversification and enhanced returns.

The basic rationale for volatility derivatives starts with the observation that index volatility is negatively correlated with its underlying index. So if you hold a long position in a volatility-based derivatives contract, it provides you with a hedge against unexpected market moves. Although strong share price movements in one market tend to cause share price movements in other markets as well, each region and market also has its own important nuances and time zones. For that reason, many investors in European equities want to rely on a European-focused measure of volatility. The index provider STOXX Ltd offers the VSTOXX volatility index that is used by Eurex as the underlying for its VSTOXX Futures and Options. These have become indispensable for an asset manager’s toolbox, adding more precision to their volatility strategies over merely using North American volatility derivatives.

Why you should consider VSTOXX®Futures
Futures and options on the VSTOXX® give investors a targeted and leveraged means to take a view on European volatility, based on the implied volatility derived from EURO STOXX 50® Index Options. Portfolio diversification and optimizing volatility exposure are amongst the strongest reasons to access volatility via VSTOXX® derivatives.

Options traders that are versed in strategies know that volatility can be traded with straddles and strangles in equity index options. However, Eurex VSTOXX Futures offer a cost efficient wayto do this, because there is no requirement to dynamically delta hedge for movement in the underlying asset.

As exchange-traded and centrally cleared derivative products, Eurex volatility index derivatives offer added benefits compared their OTC relatives in terms of independent mark-to-market valuation and substantially reduced counterparty risk due to Eurex Clearing acting as the central counterparty.

VSTOXX® Futures have been designed to better reflect European market volatility. While at first glance, it may look like VSTOXX® and VIX are highly correlated, closer investigation reveals reactions of different magnitudes for events that are more/less relevant for Europe. For professional traders, the VSTOXX®/VIX relationship presents a variety of spreading opportunities along the term structure.

How does the VSTOXX® index work?
The VSTOXX® volatility index expresses the uncertainty expected by the market that is the implied volatility of the Options on the EURO STOXX 50® index. The VSTOXX is designed as a rolling index at a fixed 30 days to expiry that is achieved through linear interpolation of the two nearest of the eight available sub-indices. The various VSTOXX sub-indices are calculated on the basis of all options available with days to expiry from 1M to 24M. The calculations are based on the market prices available for these options in the Eurex system.

Eurex Volatitily Derivatives Volume Overview September 2013
Source: Eurex Monthly Short Statistics September 2013 (2 Oct 2013)

 Eurex Volatility

 

Traded Contracts

Daily average Sep 2013

Traded Contracts Aug 2013

Change MoM

Traded Contracts Sep 2012

Change YoY

Traded Contracts Jan-Sep 2013

Traded Contracts avg Jan-Sep 2013

Traded Contracts Jan-Sep 2012

Change YtD

Mini-Futures on VSTOXX®

FVS

384,830

18,325

400,340

-3.87%

399,586

-3.69%

3,924,810

20,549

2,395,243

63.86%

Options on VSTOXX®

OVS

140,655

6,698

93,247

50.84%

86,574

62.47%

1,642,068

8,597

846,163

94.06%

Sum

--

525,485

25,023

493,587

6.46%

486,160

8.09%

5,566,878

29,146

3,241,406

71.74%

Vendor codes for Eurex Volatility Products

Mini-Futures on VSTOXX®

Eurex Product Code

Vendor

Vendor Code

Mini-Futures on VSTOXX®

FVS

Bloomberg L.P.

FVSA Index

Mini-Futures on VSTOXX®

FVS

thomsonreuters

0#FVS:

Options on VSTOXX®

OVS

Bloomberg L.P.

V2X Index OMON<GO>

Options on VSTOXX®

OVS

thomsonreuters

<0#FVS+>