Evolution and behaviour of European volatility: VSTOXX® January 2018
Evolution and behaviour of European volatility: VSTOXX® Megan Morgan Email: [email protected] Twitter: @meganbeausang
www.eurexchange.com Evolution and behaviour of European volatility: VSTOXX® January 2018
VSTOXX® and the US market
• Eurex recognized the US volatility market as a strategic area of growth upon receiving no action relief for the VSTOXX® futures in 2012
• Shortly thereafter, the exchange put in place a strategy to grow liquidity based upon changing market structure to open up the VSTOXX® market to US participants.
– Step One: Grow the liquidity in the VSTOXX® futures – Step Two: Convert the VSTOXX® Options to Options on Futures for CFTC-approval – Step Three: Work with a ETP provider to list a VSTOXX® ETN on a US-based exchange
• US participants have been keen to trade VSTOXX® to access European volatility – The index is constructed in a similar fashion as the VIX – The VSTOXX® is more reactive to European-specific events – The VSTOXX®/VIX spread is mean reverting
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A path to liquidity: VSTOXX® market structure initiatives
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A path to liquidity: grow liquidity in the underlying
FVS - ADV By Expiry FVS ADV 70,000 2012 ADV 15,000 60,000 2013 ADV 21,000
50,000 2014 ADV 27,500
2015 ADV 29,500 40,000 2016 ADV 38,200 30,000 2017 ADV 52,205 20,000
10,000 Orderbook volume growth 2012 vs 2017
0 FVS 2012 2017
Order book 71.93% 84.67%
Expiry 1 Expiry 2 Expiry 3 Expiry 4 Expiry 5 Expiry 6 Expiry 7 Expiry 8
• August 1, 2012: VSTOXX® futures received CFTC no-action relief. Volume doubled from month to month as Eurex saw an inflow of volume from US-based customers previously restricted from the contract • March 1, 2015: Extend VSTOXX® futures market hours to overlap US trading hours • November 1, 2015: Eurex revamped the VSTOXX® futures market making program adding six new market making participants improving order book liquidity.
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A path to liquidity: grow liquidity in the underlying
The effect of new market makers on order book liquidity
250.00 0.8000
0.7000
200.00 0.6000
0.5000 150.00
0.4000
100.00 0.3000 inside market spread inside market volume
0.2000 50.00
0.1000
0.00 0.0000
average size bid average size ask average spread(r.h.scale)
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A path to liquidity: open VSTOXX® Options to US participants
OVS 2 Monthly Volume By Trade Type 80,000 600,000 OVS2 ADV 70,000 500,000 2017* ADV 22,776 60,000 400,000 50,000 Orderbook volume 2017 40,000 300,000 FVS 2017
30,000 Interest Open 200,000 Order book 33.36%
Daily Volume Contract Daily 20,000 *since October 2017 100,000 10,000
0 - 3/2/2017 5/2/2017 5/9/2017 8/2/2017 9/7/2017 2/14/2017 3/30/2017 4/10/2017 4/21/2017 5/24/2017 5/31/2017 6/12/2017 6/19/2017 6/27/2017 7/11/2017 7/19/2017 7/26/2017 8/10/2017 8/17/2017 8/24/2017 8/31/2017 9/14/2017 9/21/2017 9/28/2017 10/5/2017 11/2/2017 11/9/2017 10/12/2017 10/19/2017 10/26/2017 11/16/2017 11/23/2017 11/30/2017
Orderbook Offbook Open Interest • The market is growing but remains event driven, the next level of growth is expected from systematic flow • 51 members are active now in OVS2 – the same level as before the French election period • Flow has increased from new participants based in the US as investors are able to access the CFTC compliant markets
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Evolution and behaviour of European volatility: VSTOXX® Mark Shore, Shore Capital Research LLC Email: [email protected] www.shorecapmgmt.com Twitter: @shorecap
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Evolution and behaviour of European volatility: VSTOXX®
• Past performance is not necessarily indicative of future results.
• There is risk of loss when investing in futures and options.
• Futures & options can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone.
• The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.
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Mark Shore’s bio • Over 30 years experience in the futures markets/ alternative investments • Undergrad DePaul University; MBA University of Chicago; Doctoral candidate in applied research • Former COO of VK Capital (a wholly owned $300 million AUM CTA subsidiary of Morgan Stanley) • Former Head of Risk at Octane Research, $1.1 billion AUM • Adjunct Professor, DePaul University • Contributing Author to two Wiley & Sons books on hedge funds & commodities • Contributing Writer: Eurex, CBOE, CBOE Futures, MicroCap Review, Swiss Derivatives Review, Seeking Alpha, Prime Meridian Capital Management, Coquest Advisors • Board Member Arditti Center for Risk Mgmt; PRMIA Chicago Steering Committee, NIBA Board of Directors, QWAFAFEW Chicago Steering Committee • Director of Educational Research, Coquest Advisors LLC • Hosted an internet talk show on alternative investments “Skewing Your Diversification” • Founded consulting/research firm Shore Capital Research LLC • Research of markets & trading strategies • Due diligence of managers • Business development of alternative investments • Educational workshops • Research & expert witness testimony for capital market litigation
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VSTOXX® volatility index derivatives
• VSTOXX® Spot (V2X)
• VSTOXX® Futures (FVS)
• VSTOXX® Options (OVS) – ended in Sept 2017
• (New) Options on VSTOXX® Futures (OVS2) – began Feb 2017
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VSTOXX® spot and futures VSTOXX® Futures (Eurex)
30 Day Forward Yes
Annualized Implied Volatility of EURO STOXX 50® Index
Ticker Symbol for Spot & Futures V2X (spot) & FVS (futures)
Currency Euro
Futures Began Trading (trades 8 expirations) 2009
Average Daily Trading Volume 52,580 (As of November 2017) **
Long negative volatility of underlying Market Yes
Mean Reverting Yes
Top range 45 to 50
Median* 22.8
Bottom range 13 to 17
*Spot price 1/4/1999 to 8/14/17 ** Eurex website
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STOXX®
• STOXX Limited formed in 1997. A leading index specialist based in Zurich, Switzerland (stoxx.com)
• EURO STOXX 50® Index “represents the performance of the 50 largest companies in terms of free-float market cap” of up to 11 Eurozone countries.
• Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain
• Composition is reviewed every September
• A smaller and less diversified index than S&P 500
• Heavily weighted by financial stocks ~(25%)
Source: www.stoxx.com, as of Oct 31, 2017
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EURO STOXX 50® index sector weightings Sector Weighting Country Weighting Banks 15.5% France 36.5%
Industrial Good & Services 10.8% Germany 33.1%
Personal Household Goods 9.2% Spain 10.4%
Chemicals 9.0% Netherlands 10.1%
Technology 7.3% Italy 4.7%
Healthcare 7.2% Belgium 3.1% Insurance 6.9% Ireland 1.1% Oil & Gas 6.2% Finland 1.0% Utilities 5.2% Automobiles & Parts 5.1% Food & Beverage 4.9% Telecommunications 4.8% Construction & Materials 4.1% Retail 2.2% Media 0.9% Real Estate 0.9% Total 100% Total 100%
Source: https://www.stoxx.com/document/Bookmarks/CurrentFactsheets/SX5GT.pdf As of October 31, 2017
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VSTOXX® volume & open interest (2010 to November 2017)
60,000 350,000
300,000 50,000
250,000 40,000
200,000
30,000
150,000 Open interest Open 20,000 100,000 Average Daily Volume Daily Average
10,000 50,000
0 0 2010 2011 2012 2013 2014 2015 2016 2017
Avg Daily Volume Open interest Source: Eurex website
www.eurexchange.com 14 Evolution and behaviour of European volatility: VSTOXX® January 2018 VSTOXX® spot index and EURO STOXX 50® spot index Jan 1999 to Dec 22, 2017
Source: Bloomberg data
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Utilizing VSTOXX® derivatives
• Hedging
• Directional trading
• Intra-market spreads = term structure
• VSTOXX® Futures / VIX futures spreads (relative value trading)
• Sentiment indicator
• Trading CFTC – certified options on the futures contracts
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Recent volatility events: Spot prices of EURO STOXX 50® Index, DAX index, CAC 40 index, STOXX® Europe 600 index FTSE 100 index and VSTOXX® (Jan 2007 - Dec 22, 2017)
225 European Indices Price Movement (set to 100 EUR) French 2008 Financial Greek Debt European Debt Chinese Financial Brexit Election Crisis Crisis Crisis Turmoil 200
175
150
125
100
75
50
25 Price of European Equity EUR) (in Indices Equity European of Price
0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 VSTOXX DAX STOXX Europe 600 EURO STOXX 50 CAC 40 FTSE 100
Source: “Utilizing a European volatility index for Pan European volatility”, M. Shore 2016
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Can you apply VSTOXX® derivatives to other European equity indices?
• Pan-European Correlation Spot Prices (2 Jan 2007 to 30 Sept 2016 in EUR)
EURO STOXX 50® STOXX® VSTOXX® CAC 40 FTSE 100 DAX Index Europe 600 VSTOXX® 1.00 -0.77 -0.76 -0.67 -0.74 -0.76
EURO STOXX 50® 1.00 0.98 0.85 0.95 0.96 Index
CAC 40 1.00 0.87 0.93 0.97 FTSE 100 1.00 0.82 0.94 DAX 1.00 0.93 STOXX® Europe 600 1.00
Source: “Utilizing a European volatility index for Pan European volatility”, M. Shore 2016
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European equity front months future returns vs VSTOXX® futures front month returns
60% 5-Day Rolling Return of European Equity Index Futures (2 April 2016 to 1 July 2016)
40%
20%
0%
-20%
VSTOXX DAX STOXX Europe 600 CAC 40 EURO STOXX 50 -40%
-60%
Source: Utilizing a European volatility index for Pan European volatility”, M. Shore 2016
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Why VSTOXX® is a better proxy for European volatility
900 Frequency of 5-Day Rolling Correlation of VSTOXX® Spot & VIX Spot to EURO STOXX 50® Index January 1999 to December 2013 800 700 VIX Correlation VSTOXX Correlation 600 500 400 Frequency 300 200 100 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 -1.00 -0.95 -0.90 -0.85 -0.80 -0.75 -0.70 -0.65 -0.60 -0.55 -0.50 -0.45 -0.40 -0.35 -0.30 -0.25 -0.20 -0.15 -0.10 -0.05 Correlation
Correlations of VSTOXX® spot and VIX spot to EURO STOXX 50® during -2% or greater equity market corrections Average Maximum Minimum 5 Day Rolling Period VSTOXX ® spot correlation -0.85 0.57 -1.0 VIX spot correlation -0.51 1.0 -1.0 One-Month Rolling Period VSTOXX ® spot correlation -0.83 -0.28 -0.97 VIX spot correlation -0.51 0.27 -0.87 Source: “Noisy short-term correlations in global volatility index futures: why trading one regional index futures market may not be enough”, M. Shore 2014
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Contango to Backwardation: evolution of the volatility regime shift of VSTOXX® spot and VSTOXX® futures 32 19/6/2014 19/9/2014 6/10/2014 10/10/2014 16/10/2014 30
28
26
24
22
20
18
16
14
12 1 2 3 4 5 6 7 8 9
• VSTOXX® is in contango 70% of the time since 2011: source Eurex Exchange
Source: “An analysis of why volatility indexes are relevant”, M. Shore 2014
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VSTOXX® futures curves regarding 2017 French election (Dec 2016)
Source: Bloomberg data
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VSTOXX® futures curves regarding 2017 French election (Jan 2017)
Source: Bloomberg data
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VSTOXX® futures curves regarding 2017 French election (Feb 2017)
Source: Bloomberg data
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VSTOXX® futures curves regarding 2017 French election (Mar 2017)
Source: Bloomberg data
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VSTOXX® futures curves regarding 2017 French election (April 2017)
Source: Bloomberg data
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VSTOXX® futures curves regarding 2017 French election (May 2017)
Source: Bloomberg data
www.eurexchange.com 27 Evolution and behaviour of European volatility: VSTOXX® January 2018 Spread price of VSTOXX® / VIX spot index spread 1 January 2009 to 22 December 2017
• VSTOXX®/VIX spread is volatile and mean-reverting, and is range bound over time. • Since Jan 2007, the spread has averaged 4.4 points (VSTOXX® over the VIX). • Since Jan 2014, the spread has averaged 5.3 points (VSTOXX® over the VIX). – In 2016 the average spread jumped to 8.02 points due to European-specific volatility. – Greek Crisis: In June 2015, the spread went to 13 due to the Greek Crisis then went below 1.0 in August 2015 when US equities tumbled. – In June 2016, the spread went over 20 due to the Brexit. – April 2017 the spread exceeded 11 due to the French election.
25 European banks in need of financial aid VSTOXX® / VIX Spot Index Spread 20 Rumors over a possible bank Brexit French Rumors of possible Greek default withdrawal freeze in Greece Election 15 S&P cuts Greek debt to junk
10
5
0
-5
-10 Dow opened 1000 points down NBER announced the US Economy official Recession -15 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: “VSTOXX/ VIX volatility spread behavior during recent volatility events”, M. Shore 2016
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Potential ideas to think about regarding trading OVS2 • The term structure of VSTOXX® Futures is frequently in contango (spot price is less than futures prices)
• When volatility begins to show up in the VSTOXX® index, it tends to experience greater moves in the spot, front and nearby futures months:
• If the market is in contango and an expectation of a larger move in the front month vs back months: – buy calls in the front month and buy puts in the back months – sell puts in the front month to receive some premium and the expectation the front month may move higher
• If the market is expected to remain in contango: – buy puts in the back months as the price of the back months may decline as they move closer to expiration
• If the futures term structure is in backwardation for an extended period of time: – determine to either buy puts or sell calls in the front month or nearby month with the perspective of the VSTOXX® futures potentially moving lower
Source: “Introduction on CFTC – certified Options on VSTOXX® Futures” M. Shore 2017
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For more information
• Go to: http://www.eurexchange.com/exchange-en/products/vol/vstoxx
http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook
• Or to: http://www.shorecapmgmt.com/vstoxx-articles.html
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Thank You
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