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Cheap Protection On VSTOXX Eyed Ahead Of EU Elections

Release date: 18 Apr 2019 | Eurex Group

Cheap Protection On VSTOXX Eyed Ahead Of EU Elections

Article by Georgia Reynolds, EMEA Reporter

This article first appeared in EQDerivatives' subscription Commentary & News service.

Investors can pick up cheap protection on the VSTOXX ahead of the European Union elections next month, after the index level plummeted to 11 vol points from 15 vol points over the last few days as a result of the Brexit extension and European Central Bank meeting last week. 

This flow is mainly driven by the unwinding of protection puts ahead of Brexit and the E.U. elections, as the market seems more focused on the short-term carry now as opposed to the political risks lying ahead, said Reda Benali, index derivatives trader at BNP Paribas in London. “Now, we are reaching completely depressed levels with the downside risk of owning European volatility being more limited, we could see investors start picking up cheap protection [on the VSTOXX] via a call spread financed by puts on short-term maturity,” he said. 

Cathal Hardiman, institutional trader at IMC in Amsterdam, said since April 11 (the first day after the E.U. summit where the Brexit extension was agreed) he has seen relentless selling of May Euro Stoxx 50 vol with more than EUR30 million vega sold. “This leaves market makers long a lot of gamma which may contribute to keeping realized vol levels depressed for the next few weeks,” he said. Flow in the VSTOXX has been following this SX5E vol selling flow, Hardiman said, adding: “Lower vol means [that] short vol funds have more money to invest. Some of the regular monthly rolling VSTOXX orders we see are as much as 30% bigger this month versus last month.”

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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