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Spotlight on:VSTOXX® –Discovering volatilityResearch papers on European volatility & articles on real life applications

2

Table of contents

03 Foreword

Research Papers –Discovering volatility/focus on VSTOXX®

Colin Bennett on volatility trading05 Part 1: The evolution of volatility products09 Part 2: Volatility Futures as an alternative

to equity and puts

Mark Shore on VSTOXX Derivatives15 Part 1: Utilizing a European volatility index

for Pan-European volatility21 Part 2: VSTOXX®/VIX volatility spread behavior

during recent volatility events28 Part 3: Introduction of CFTC-certified options

on VSTOXX® Futures

Articles –Real life applications

Robert McGlinchey: 34 Directional VSTOXX® Options flow spikes

on Friday as event risk grows nearer35 VSTOXX® Futures spreads garner interest

as key events near

Georgia Reynolds: 37 EMEA: selling Nov. VSTOXX® put to buy

Dec. call spread pricing attractively38 Italian referendum date clarity adds to favorable

long VSTOXX® short VIX RV play38 VSTOXX® term structures at three year highs,

despite macro risks39 Barclays signals show VIX/VSTOXX® futures

spread strategy to continue outperforming

41 Contacts

3

Foreword

2017 is shaping up to be yet another record year

for our volatility products. Open interest on

VSTOXX® Futures and VSTOXX® Options have

reached record high with 420,000 and 1,200,000

contracts respectively.

The VSTOXX® Futures and VSTOXX® Options

continue to strengthen their position as the European

benchmark for volatility, with an increasing number

of market participants using Eurex’s volatility

offering to gain or hedge their exposure in Europe.

This booklet is a compilation of selected research

papers on European volatility as well as a series

of articles highlighting real life applications for these

products. Written by experts from across the globe,

this booklet aims to share further insights on

the evolution of volatility, highlight volatility trading

strategies and feature successful real life applications

during those volatile times.

VSTOXX®, the European volatility benchmarkVSTOXX® Derivatives are designed to reflect

the investor sentiment and overall economic

uncertainty by measuring the 30-day implied

volatility of the EURO STOXX 50®.

Futures and options on VSTOXX® offer the most

accurate and cost-effective way to take a view

on European volatility. Unlike trading volatility with

hedged index options, there are no transaction

costs in managing deltas for VSTOXX® Derivatives.

VSTOXX® Derivatives are exchange-traded and

centrally cleared, providing independent mark-to-

market valuation and robust liquidity.

About Eurex ExchangeEurex Exchange, one of the world’s leading derivatives

exchanges, offers about 2,000 products across

nine traditional and alternative asset classes to provide

market participants with a broad product diversity

for greater opportunities.

Our futures and options on EUR-denominated govern-

ment bonds and derivatives on the benchmark indexes

DAX® and EURO STOXX 50® are among the most

actively traded interest rate and equity index derivatives

in the world.

Eurex Exchange offers the broadest complex of listed

MSCI Index Futures and Options, available via the order

book as well as via Eurex Trade Entry Services.

Our volatility futures and options on the VSTOXX®

highlighted in this booklet offer a convenient and

cost-effective way to take a view on European volatility.

4

Research Papers –Discovering volatility/focus on VSTOXX®

These research papers go in more depth into volatility products and history, but also drill down on some of the usage and benefits of the VSTOXX®.

5

Original VIX suffered from launch of variance swapsat the same timeWhile the original S&P100 VIX was a significant innovation

in 1993, the product became almost immediately out-dated

as variance swaps were also launched at a similar time.

Variance is the square of volatility, which makes variance

a difficult concept to understand. However as the pay-out

of a delta hedged option is variance, not volatility, variance

is mathematically the correct measure of deviation. This can

be seen in the diagram below, which shows that a delta

hedged option makes 4x the profit when you double

the stock price movement. If the payoff of an option

was based on volatility, not variance, then a delta hedged

option would make 2x the profit when you double

the stock price movement.

Original VIX was based on ATM volatilityThe first volatility index was the original S&P100 VIX,

which was created by Professor Robert Whaley on behalf

of CBOE in 1993 (and back calculated from 1986).

Before this date a volatility index was simply an academic

concept that had been discussed since 1987. The original

VIX was based on S&P100 ATM volatility of: calls and

puts; strikes above and below spot; expiry before and

after the 22 trading day (c30 calendar days or c1 month)

maturity of the index. The calculation methodology

therefore uses as an input 8 different ATM implied

volatilities, which is reduced to a single VIX value using

the below process:

• Average the call and the put implied volatility for

options of same strike and expiry. This reduces

the 8 original data points to 4.

• Linearly interpolate between the two strikes of

options of same expiry to get spot ATM volatility.

The 4 data points are therefore reduced to 2.

• Linearly interpolate (or extrapolate if the nearest

maturity is within 8 calendar days, as near dated

implies, suffer from data quality issues) to get

a 22 trading day implied volatility.

Colin Bennett on volatility trading Part 1: The evolution of volatility productsPublished: 30 May 2016 | Eurex Exchange

The first in a 2 part series of articles on volatility, this introductory report describes the evolution of the volatility product landscape over time, and the different methods of calculating volatilityindexes. Example trades for both volatility futures and options on volatility futures are shown.

About Colin Bennett

Colin Bennett is the author of “Trading Volatility”, the top

ranked book on Amazon for volatility. Previously he was

a Managing Director and Head of Quantitative and

Derivative Strategy at Banco Santander, Head of Delta 1

Research at Barclays Capital, and Head of Convertible

and Derivative Research at Dresdner Kleinwort.

6

Volatility Indexes are now usually based on varianceAs variance swaps became increasingly popular post-1998

due to the LTCM crisis, it became clear that a volatility

index should be based on a variance swap calculation

(which uses the implied volatility of all strikes) not an ATM

volatility calculation (which only uses the implied volatility

of 8 options). A new VIX was therefore launched in 2003

with a variance based calculation, and the underlying

changed from the S&P100 to the S&P500. The original

S&P100 VIX was renamed VXO. While the majority of

volatility indexes use a variance based calculation, there are

a few volatility indexes on less liquid indexes (which only

have reliable data for ATM options) that continue to use

an ATM volatility calculation.

Different index providers use different variants of variance calculationThe major drawback of a variance based calculation is the fact

this requires perfectly liquid options for every strike (zero to

infinity). To insure the volatility index has a sufficiently high

data quality, less liquid OTM options need to be excluded

from the calculation. While the calculation of a variance swap

is purely mathematical, and therefore impossible to copy-

write, each index provider has their own bespoke method

of removing illiquid options which is subject to copy-write.

For this reason the calculation method of volatility indexes

of different providers is slightly different.

Old VIX, new VIX, VDAX®, New VDAX® and VSTOXX® launch date and first data point

1986 1990 1992 1994 1999 2003 2005

�VDAX®Rec.

�V1X (VDAX® NEW)Reconstructed V1X

�V2X (VSTOXX®)Reconstructed V2X

�V3X (VSMI®)Reconstructed V3X

�VIXReconstructed VIX

�VXO (original VIX until 2003, now known as VXO)Reconstructed VXO

7

As volatility means reverts over a period of a few months,

the sensitivity of VSTOXX® Futures to the VSTOXX®

decreases as maturity increases. For this reason, it is not

usually wise to trade VSTOXX® Futures of maturity

6 months or more.

Volatility futures can offer cheaper protection than puts when volatility is lowWhen equity markets plummet, this normally happens with

high volatility. Conversely, when equity markets rise

they tend to do so gradually with low volatility. This means

volatility is negatively correlated to the equity market.

A long volatility future position can therefore be used to

hedge a long equity position. A portfolio of long volatility

futures and long equity should therefore have a low

volatility, and hence lower risk of significant negative returns.

As volatility is on average expensive, this reduction in

risk comes at the expense of a lower average return.

However using volatility futures can be a cheaper hedge

than buying put options. This is because a put option

expires worthless if equities do not decline, while implied

volatility is floored and never declines to zero.

Selling volatility earns small profits on average, so needs to be done regularly and with short maturity (1 month)Investors can therefore profit from selling volatility futures.

The disadvantage of this strategy is that while on average

small returns are earned, occasionally a large loss is suffered.

This strategy could be seen to be similar to selling insurance.

Volatiliy indexes are not tradableThe calculation of a volatility index is based on the implied

volatility for a fixed number of days, normally 30 calendar

days. As listed options are only available for monthly or

weekly expiries, for the majority of days a volatility index

has to use as an input the implied volatility for two expiries

(normally the expiry just before and just after the theoretical

expiry of the index). A volatility index is therefore only

useful as an indicator of how volatile the market expects

the underlying to be. If an investor wants to trade volatility,

they have to use an instrument with a fixed expiry such

as a volatility future (or an ETN/ETF whose payout is based

on volatility futures, like the VSXX1).

Can trade volatility through futuresAs a future has a fixed expiration, it can be hedged with

a portfolio of options which also have a fixed expiration.

This means that market makers are able to offer liquidity on

futures on volatility indexes, as they can hedge their risk

with ordinary option on the underlying equity (or equity

index). The expiration of volatility futures is chosen so at

maturity they are 30 days from the ordinary options expi-

ration, as 30 days is the market standard expiration for

volatility indexes. Having this non-standard expiration means

that market makers only need to hedge most of their

volatility risk with one expiry2. This reduces hedging costs

which allows them to narrow their bid offer spreads.

Volatility futures as a hedge should have maturitybetween 2 and 5 monthsAs put options are typically used to buy protection, investors

typically buy (rather than sell) them. This usually lifts the

value of implied volatility above fair value. As a future on

a volatility index is based on the implied volatility of options,

they are on average expensive. This can be seen from

the diagram below, which shows the average daily return

for VSTOXX® Futures in the 3 months approaching expiry.

As the average daily loss for VSTOXX® Futures between

2 and 5 months or more to expiry is relatively small,

this is the optimum maturity for long VSTOXX® strategies.

1 The VSXX is the VSTOXX® equivalent of the VIX based VXX.

2 As a volatility future is similar to a forward start on volatility (or variance),the position will need to be hedged with two expiries (the main risk from the farthest maturity at the end of the forward start, but also a smaller amount of risk from a nearer dated expiry at the beginning of the forward start).

8

Most of the time a small premium is earned, but in the event

of an accident a large loss has to be covered. Given the

asymmetric risk reward profile of selling volatility futures, it is

only seen to be worthwhile if done regularly (in the same

way an insurance company sells lots of insurance, and does

not do it as a one off). As VSTOXX® Futures suffer on

average the largest loss in the final month to expiry (see

diagram on page 3), this is the optimum maturity for

a short volatility strategy.

Volatility futures can offer higher returns than equity futuresWhile it is rare for equities to double or halve over periods

less than 1 year, it is possible for volatility to double in a few

days or halve in periods as short as a month. Investors who

have high conviction regarding the direction of markets

can consider volatility futures to be a more profitable way

of expressing that view. We would caution that with

the higher potential reward, there is higher potential risk.

Options on volatility futures also offer volatility exposureInvestors who wish to be long volatility are normally

expecting a volatility spike. While volatility futures will be

profitable in the event of a volatility spike, call options

on volatility could be significantly more profitable as they

offer geared exposure to any volatility upside. The chart

above shows the 3 months return for VSTOXX® 20 strike

(i.e. roughly ATM) call options against the 3 month

return for the identical maturity VSTOXX® Future. As can

be seen, the profits on a long VSTOXX® call option can

be up to 10 times larger than profits on VSTOXX® Futures.

This additional exposure to volatility spikes comes at

the cost of a far larger average loss (24%) than the average

loss on VSTOXX® Futures (6%) over the 3 month period.

Buying puts on volatility futures profits from expensive implied volatilityOptions on equity indexes are normally overpriced,

and the greater the maturity the more expensive they are

on average. Because of this, investors can on average

profit through buying put options on volatility futures,

particularly when volatility is high (as volatility tends to

mean revert, hence if it is high it is likely to decline).

9

Volatility Futures were first listed in EuropeThe DTB (now Eurex) was the first exchange to list Volatility

Futures. These VOLAX® Futures were based on ATM

3 month implied on the DAX®, and they were listed in 1998

(and subsequently delisted later the same year). Six years

later in 2004 Volatility Futures were listed on the VIX, which

was swiftly followed a year later by the launch of VSTOXX®

(and VDAX® and VSMI®) futures in 2005.

Volatility has negative correlation to equityAs volatility tends to rise when equities decline, a long

Volatility Futures position can be taken as a hedge.

For short periods of time (e.g. over 1 day or 1 week) there

appears to be a linear negative relationship between

volatility and equity returns, as can be seen in the chart

below (we note this hedge has a certain amount of noise).

Volatility can have convex profile versus equities, just like a putReturns over relatively short periods of time hide the fact

that volatility is floored at a certain level, for example

the VSTOXX® never trades below c12%. This means that

the loss from a long VSTOXX® Future is floored, hence

returns over a longer time period (e.g. 3 months) show

a more convex profile than daily returns. A long Volatility

Future can therefore be compared against puts, particularly

when volatility is low and the impact of the volatility floor

is greatest.

Long ATM SX5E put has similar payout to 5 VSTOXX®

Volatility FuturesAs a Volatility Future is a future on a 1 month Volatility

Index, the implied volatility of a 3 month Volatility Future

trades in line with that of a 4 month put. The return of

Volatility Future of 3 month expiry until maturity should

therefore be compared to the 3 month return of a 4 month

put (i.e. the return of a put with 4 month maturity up until

it has only 1 month left to expiry). Similarly, the return of

a Volatility Future with 1 month until expiry should be com-

pared to the 1 month return of a 2 month put (i.e. return

of a put with 2 month maturity until it has only 1 month left

to expiry). For both 3 month Volatility Futures (vs 4 month

ATM put) and 1 month Volatility Futures (vs 2 month ATM

put) the payout of an ATM put is very similar to the payout

of 5 VSTOXX® Volatility Futures. Hence 5 VSTOXX® Volatility

Futures could be considered an alternative to one SX5E ATM

put. It should be remembered that the payout of a Volatility

Future is less reliable than that of a put.

Part 2: Volatility Futures as an alternativeto equity and putsIn our final part of our 2 part series on volatility, Volatility Futures are examined in depth both as an alternative to equity and as an alternative to puts. The key characteristics of tradingvolatility in practice are demonstrated, and the differences between Volatility Futures andVariance Swaps analyzed.

Daily returns of V2X versus SX5E

V2X Futures versus SX5E put

10

Volatility Futures implied should be compared withunderlying index implied one month laterAs Volatility Futures are a based on 1 month forward

volatility, they should be compared with the volatility of

the underlying index 1 month later than the Volatility

Futures expiration. The term structure of Volatility Futures

therefore has a 1 month offset to the term structure of

the underlying index.

For example, the Volatility Futures for VSTOXX® December

expiry should be compared with the SX5E January expiry

the following year. This is because the December expiration

of the VSTOXX® is based on what the VSTOXX® is on

the (3rd or 4th Wednesday) Volatility Futures expiration in

December. On the December Volatility Futures expiration,

the VSTOXX® 30 day volatility is based on the index

(3rd Friday) January expiry (of the following year) of the

SX5E options. Due to the large number of public holidays

between December and January expirations (Christmas

and new year) the SX5E volatility term structure normally

has a dip in January. Therefore VSTOXX® volatility

term structure normally has a dip in December (due to

the 1 month offset).

Volatility mean reversion dampens returns of far dated futuresWhen an unexpected event occurs, volatility normally

jumps. As markets digest the news, volatility tends to

soften and mean revert over a period of up to 10 months.

This mean reversion can be seen by plotting the minimum

and maximum implied volatility per maturity (a volatility

cone) as can be seen in the chart below. As near dated

implieds have a wider min-max range than far dated implieds,

this means that when a volatility index spikes near dated

Volatility Futures rise more than far dated volatility futures.

Far dated Volatility Futures could be seen as a more stable

(or less levered) way of gaining volatility exposure.

Volatility futures could outperform putsWhile the performance of a SX5E ATM put and 5 VSTOXX®

Volatility Futures appears similar, the payout of 5 VSTOXX®

Volatility Futures has historically been higher than for SX5E

ATM puts. This means using VSTOXX® Volatility Futures for

protection could outperform using SX5E ATM puts.

Volatility Futures trading in practiceTrading Volatility Futures allow a volatility position to be

taken without the overhead of delta hedging an option.

Before trading Volatility Futures it is important to take into

account the key differences between volatility trading via

options, and Volatility Futures.

Volatility Futures are a forward on volatilityUpon expiration of a Volatility Futures, the pay-out is based

on the underlying Volatility Index. Hence when trading

a Volatility Futures, the profit and loss is based on a future

on volatility (which is the same as a forward on volatility,

as a future is simply a listed forward). While trading a forward

on volatility has many similarities with trading volatility

itself, there are also important differences.

Volatility Futures expiration is 30 days prior to normal expiryTo make it easier for traders to hedge their Volatility Futures

position, a Volatility Futures expires 30 days (the maturity

of the underlying volatility index) prior to a normal option

expiration. As expiration is normally on the 3rd Friday of

a month, a Volatility Futures expiration will be on the 3rd or

4th Wednesday of a month (as normal option expirations

can be 4–5 weeks apart, i.e. 28–35 days).

Non-standard expiry (3rd or 4th Wednesday) makesVolatility Futures easier to hedgeWhile having a non-standard expiry could be seen to be

confusing, it does mean that on the date of expiration,

the underlying Volatility Index is calculated using the implied

volatility for only one maturity (no interpolation or extra-

polation between two expiries is needed). A Volatility Futures

that expires in November, will therefore be hedged by

trading a strip of options for the December expiry one

month later.

11

Near dated Volatility Futures have highest sesitivityto index, but need to be rolled more frequentlyWhile near dated Volatility Futures are more sensitive to

the underlying Volatility Index, the position needs to be rolled

frequently. Before deciding on the maturity of a Volatility

Futures, an investor needs to decide how much overhead

(i.e. rolling frequency) they are willing to take, and how

sensitive to moves in volatility they want the position to be.

For example, while the front month Volatility Futures has

a very high delta (90%) with the Volatility Index this would

require rolling every month.

Volatility mean reversion reduces delta of far dated futuresVolatility tends to jump, and then mean revert over a period

of time just under 1 year. Near dated Volatility Futures will

therefore have a delta (or exposure/sensitivity) to the under-

lying Volatility Index of nearly 100% (e.g. c90% for 1 month

volatility futures). The delta (or exposure/sensitivity) of

Volatility Futures will fall as maturity increases, as mean

reversion makes it unlikely that the current levels of volatility

will remain over the entire life of the Volatility Futures.

Delta of VSTOXX® Futures versus VSTOXX®

12

A plot of the sensitivity (i.e. delta) of Volatility Futures to

the underlying Volatility Index is shown above both for

rolling every month, and for rolling at expiry. For example,

the 3 month data point can either always have a 3 month

maturity (i.e. it is rolled when the maturity reduces to

2 months) or can have a maturity between 0 and 3 months

(i.e. it is rolled at expiry). The delta when rolling at expiration

can be considered a blend of the deltas when 1 month

rolling. For example, the delta of a 3 month future rolled at

expiry is a blend of the deltas of the 3, 2 and 1 month

future rolled after 1 month.

Grafik 10

Using 1 month or 3 month futures is best (when rolled at expiry)The diagram above shows the delta of a Volatility Futures

rolled at expiry vs the number of times in a year you have

to roll the position. Investors seeking the highest delta should

always use 1 month futures and roll 12 times per year.

Investors seeking a balance between the delta, and the over-

head of rolling the position should use 3 month futures and

roll at expiry (i.e. roll 4 times a year). While using 2 month

futures has a higher delta than 3 month futures, it is not very

significantly for the additional overhead of rolling 6 times

a year rather than 4. Using 4 month futures only saves 1 roll

per year (as you roll 3 times not 4) and has a significantly

reduced delta compared to 3 month futures.

While near dated Volatility Futures are most sensitiveto index, they also suffer from being most expensiveIn addition to considering the sensitivity of a Volatility

Futures to the underlying index, and the number of times

the position has to be rolled, and investor should also

consider how expensive the position is to hold. As term

structure is on average upward sloping, this means a Volatility

Futures should on average decline as maturity approaches.

As the slope of term structure is relatively flat at the far end,

longer dated Volatility Futures suffer less from time decay than

near dated Volatility Futures. This can be seen in the diagram

below. To reduce the impact of time decay an investor can

use far dated futures, potentially rolling when the position

is 2 months or less. This strategy would have a lower delta

than using near dated futures. There is in effect a trade-off

between the cost of holding the position, and the effective-

ness of the position. Should an investor be using Volatility

Futures tactically (i.e. not all the time, but only in advance

of key events likely to cause high volatility) near dated

Volatility Futures are likely to be preferred. If an investor

is using volatility strategically (i.e. continuously as part of

a diversified portfolio) far dated Volatility Futures (potentially

rolled before expiry) is likely to be preferred.

Volatility Indexes overestimate future volatility A variance based estimate includes not only information

about future volatility, but also includes a volatility risk

premium. As a volatility risk premium lifts the value of

a variance based Volatility Index, Volatility Indexes usually

overestimate future volatility. This means that selling

Volatility Futures is a viable way of earning alpha.

Volatility Futures settlement can suffer from imbalancesA Volatility Futures will be hedged with a strip of options of

all strikes. As OTM options are typically less liquid than

ATM options, Volatility Index providers have rules to exclude

Futures delta versus number of times roll per year

13

Fair price of Volatility Futures is below forward varianceVolatility Futures tend to trade just below the levels of

forward variance. If a Volatility Futures traded at the same

level as forward variance an arbitrageur could simply go

long forward variance and short Volatility Futures to construct

a portfolio that can only earn profits. This can be seen by

looking at the pay-out of a VSTOXX® Volatility Futures and

a forward 30 day (to match VSTOXX®) variance swap

for identical vega. We shall assume the strike of both the

VSTOXX® and forward variance is 20. As vega gives

the P&L sensitivity to volatility, having identical vega means

the pay-out should be identical for small deviations of vola-

tility about the level 20 (i.e. the gradient of the two lines

are identical for volatility at 20). The diagram below shows

the pay-out of forward variance is always equal to or above

the pay-out of the VSTOXX® (if they are the same price),

hence a long forward variance short VSTOXX® portfolio only

has a positive pay-out.

Grafik 12

Volatility Futures discount to forward varianceincreases as maturity and volatility of volatilityincreasesFor reasonable prices (i.e. volatility future price less than

forward variance) the profile of a long Volatility Futures

and short forward variance swap is similar to short straddle

on volatility of volatility. This means the difference between

a volatility and forward variance should increase as the

maturity increases, and as volatility of volatility increases

(just as the premium of a short straddle increases as time

increases and volatility increases). While we have used

Volatility Futures in this example, volatility swaps (which

can be approximated by ATMf volatility) can be substituted

for Volatility Futures.

OTM options if they are too far OTM or are illiquid. While

this improves the reliability of the Volatility Index calculation,

it makes it harder for traders to hedge as they are not

certain if they need to trade an OTM option or not (a sudden

change in spot or liquidity approaching expiry could cause

the option to be included or excluded from the calculation).

In deciding the methodology, there is a trade-off between

how easy it is for liquidity providers (i.e. market makers and

traders) to hedge and data reliability. Typically end clients

are reluctant to trade an instrument that could expire at

a significantly different value to the prints just before and

just after expiration. Just as there have been issues with

the settlement price of equity indexes (e.g. the FTSE June

2005 expiration) there can be issues with the settlement

price of Volatility Futures.

AppendixFor all the examples in the appendix we shall for simplicity

assume that the calculation of the volatility index is

identical to a variance swap. This means the difference

between forward volatility, Volatility Futures and forward

variance is not related to any chopping of OTM tails or

any other practicalities of Volatility Futures.

Volatility Futures fair price is not equal to forward varianceDespite the fact Volatility Futures use a variance swap based

calculation, the fair price of a Volatility Futures is not equal to

forward variance. In fact the fair price of a volatility future is

below that of forward variance. As maturity (and volatility

of volatility) increases the difference between the price of

a variance swap and Volatility Futures widens. This can be

seen by comparing a Volatility Index such as the VSTOXX®

with a forward variance swap. We note that volatility of

volatility can be seen in an index such as the VV2X, which

is the volatility of options on VSTOXX® Futures.

VSTOXX® with same price as forward var

14

To see this effect graphically we shall first examine the pay-

out of a long Volatility Futures and short forward variance

swap. We shall assume the forward variance swap is trading

at 20 (as before) but this time the VSTOXX® volatility future

trades 1 point lower at 19.

Grafik 13

The pay-out of a long Volatility Futures short forward

variance is then similar to a short straddle on volatility

(as can be seen from the below diagram).

Grafik 14

Volatility Futures is short volatility of volatilityAs the volatility (or variance) exposure of a variance swap

can be hedged with a static portfolio of options, a variance

swap has no volatility of volatility risk. As the pay-out of

a Volatility Futures is linear in volatility, this means it is short

volatility of volatility.

This can be seen in the diagram above, if volatility remains

near 20 (i.e. low volatility of volatility) a Volatility Futures

is more profitable than a forward variance swap. If volatility

suddenly changes to be very high or very low (i.e. high

volatility of volatility) then a Volatility Futures is less profitable

than a forward variance swap. As a (forward) variance swap

is neither long nor short volatility of volatility risk, this means

a Volatility Futures is short volatility of volatility risk (as it

profits when vol of vol is low, and suffers when vol of vol

is high).

Options on Volatility Futures can hedge volatility of volatility positionAs Typically Volatility Futures are expensive, which is why

many trading desks put on a short Volatility Futures long

forward variance position. As a short Volatility Futures position

is long volatility of volatility, this means a short Volatility

Futures long forward variance position is also long volatility

of volatility (an uncapped variance swap has zero volatility

of volatility exposure). The value from this position can be

extracted by selling (a strip of) options on Volatility Futures,

as options on Volatility Futures (like most options) are on

average expensive.

Post credit crunch, many banks prefer to tradeVolatility Futures/swaps rather than variance swapsBy some measures the levels of volatility seen post Lehman

bankruptcy were higher than during the great depression.

As there was a long low volatility bull market between 2003

and 2007, risk departments were not prepared for the

extreme pay-outs of convex instruments such as variance

swaps. Now there is a preference for non-convex instru-

ments, such as Volatility Futures or volatility swaps,

as many banks prefer to take (small) vol of vol risk than

(high) convexity risk.

VSTOXX® with same price as forward var

VSTOXX® – Forward 30 day variance

15

Market reactions to the Brexit vote are still being determined

and several European elections right around the corner,

this is a timely opportunity to examine various moments of

global macro volatility and how several European equity

indexes behaved during these moments.

Does this discussion begin to identify a larger macro story

of positive correlation behavior of several European equity

indexes? If so, could investors find potential utility in

the VSTOXX® Futures volatility index?

In past articles, I’ve discussed the negative correlation

between the VSTOXX® volatility index and the EURO

STOXX 50® Index and how the volatility index tends

to rally when equities decline (downside volatility).

The recent passing of the Brexit vote on 23 June 2016

introduced immediate uncertainty and downside volatility to

the global capital markets. The results of several upcoming

European elections could introduce more uncertainty and

volatility into the capital markets. According to Bloomberg

News, 40 percent of the EU economy will be voting

in 2017.1

Mark Shore on VSTOXX® Derivatives

Part 1: Utilizing a European volatilityindex for Pan-European volatilityPublished: 23 January 2017 | Eurex Exchange, Eurex Group

Mark Shore

has more than 25 years of experience in the futures markets

and managed futures, publishes research, consults on

alternative investments and conducts educational workshops

(see full biography on page 32).

Part 1: Utilizing a European volatility index for

Pan-European volatility 15

Part 2: VSTOXX®/VIX volatility spread behavior

during recent volatility events 21

Part 3: Introduction of CFTC-certified options

on VSTOXX® Futures 28

1 https://www.bloomberg.com/news/articles/2016-07-31/europe-elections-2016-17-the-votes-to-watch

16

Table 1: VSTOXX® Futures yearly volume and open interest as of Sept 2016

Total volume

7,090,656

7,226,833

6,962,188

5,324,708

3,901,530

1,889,492

431,669

14,715

YOY change

26.1%

3.8%

30.8%

36.5%

106.5%

337.7%

2,834.0%

12.0%

Daily average volume

36,739

28,341

27,519

21,046

15,300

7,352

1,686

58

Open interest

295,348

108,132

173,986

184,900

224,061

68,088

58,700

1,304

2016

2015

2014

2013

2012

2011

2010

2009

Source: Eurex Exchange monthly statistics

Table 2: Correlation matrix of daily spot returns of VSTOXX®, EURO STOXX 50® Index, CAC 40 index, FTSE 100 index,

DAX® index and STOXX® Europe 600 index from 2 Jan 2007 to 30 Sept 2016 (in EUR)

VSTOXX®

1.00

EURO STOXX50® Index

–0.77

1.00

CAC 40

–0.76

0.98

1.00

FTSE 100

–0.67

0.85

0.87

1.00

DAX®

–0.74

0.95

0.93

0.82

1.00

STOXX®

Europe 600

–0.76

0.96

0.97

0.94

0.93

1.00

VSTOXX®

EURO STOXX 50® Index

CAC 40

FTSE 100

DAX®

STOXX® Europe 600

Source: Bloomberg data

Liquidity is always important to an investor or trader. Table 1

gives readers an overview of the VSTOXX® Futures liquidity

over the last years.

When examining the correlation of several European equity

indexes, Table 2 demonstrates the relatively high positive

correlation among various European spot equity indexes and

a relatively high negative correlation the equity indexes

tend to experience relative to VSTOXX® spot. An initial obser-

vation indicates the volatility index may offer added value

to multiple European equity indexes if the indexes tend

to be positively correlated.

When analyzing correlations on a dynamic basis of a 20-day

rolling correlation in Chart 1, the positive correlation of

the EURO STOXX 50® Index remains relatively consistent to

the CAC 40, DAX® and STOXX® Europe 600 indexes.

This result begins to build an argument for the VSTOXX®

volatility index to offer an added value for investors

with exposure to multiple European equity indexes. There is

greater variance of correlation of the EURO STOXX 50®

Index to the FTSE 100 index.

When the FTSE 100 index is removed from the chart,

a relatively high consistent positive correlation between

the CAC 40, DAX® and STOXX® Europe 600 indexes

to the EURO STOXX 50® Index on a 20-day rolling basis

becomes more apparent.

17

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

EURO STOXX 50® / CAC EURO STOXX 50® / FTSE 100

EURO STOXX 50® / DAX® EURO STOXX 50® / STOXX® Europe 600

Jan 2007

M

Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

Chart 1: 20-day rolling correlations of EURO STOXX 50® Index to CAC 40, DAX®, FTSE 100 & STOXX® Europe 600 indexes

1.00

0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.55

Jan 2007

Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

EURO STOXX 50® / CAC

EURO STOXX 50® / DAX®

EURO STOXX 50® / STOXX® Europe 600

Chart 2: 20-day rolling correlations of EURO STOXX 50® Index to CAC 40, DAX®, & STOXX® Europe 600 indexes

18

12,000

10,000

8,000

6,000

4,000

2,000

360

300

240

180

120

60

EURO STOXX 50® CAC 40 FTSE 100 DAX® VSTOXX® STOXX® Europe 600

Jan 2007

M

Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

Price of European equity indexes (in EUR) Price of VSTOXX® (in EUR)

Chinese Financial Turmoil Brexit

2008 Financial Crisis

Greek Debt Crisis

European Debt Crisis

Chart 3: Spot prices of EURO STOXX 50® Index, DAX® index, CAC 40 index, STOXX® Europe 600 index FTSE 100 index and VSTOXX® from Jan 2007 to Sept 2016

No one has a crystal ball to identify when equity markets

will decline. The so-called rare “Black Swan” events have

occurred several times over the last decade. Beginning in

2008 with the Financial Crisis and followed by the Greek

Debt Crisis, and followed by the European Debt Crisis,

and followed by the Chinese Financial Turmoil and followed

by the Brexit vote. In each of these global macro events

the five European stock indexes declined and VSTOXX®

volatility index rallied.

As noted in Chart 3, the equity indexes tended to peak,

decline and find support around the same time. This suggests

when the global macro events occur, investing in equities

geographically across Europe may not offer enough diversi-

fication to reduce the portfolio correlation risk and tail risk.

The returns in Table 3 are based on when the EURO

STOXX 50® Index peaked and bottomed surrounding each

event and how the VSTOXX® volatility index and the four

European equity indexes behaved during each period. During

the five volatile periods the five equity indexes experienced

similar negative returns. In the same periods the VSTOXX®

spot index rallied. This is in-line with the previous corre-

lation data showing negative correlation of the VSTOXX®

index to the European equity benchmarks.

19

Based on 5-day rolling returns, Chart 4 demonstrates

how the front month futures contracts of the four European

indexes traded with similar returns prior to and post

the Brexit vote on 23 June 2016. Once again, this offers

some more evidence to the positive correlations among

the respective European equity indexes discussed earlier.

When the 5-day rolling returns of front month VSTOXX®

Futures is added to the chart, the negative correlation

performance of VSTOXX® Futures becomes very pronounced

relative to the front month futures contract of the four

European equity indexes. Once again, the results may

offer the option to employ VSTOXX® Futures with several

European equity indexes besides the underlying EURO

STOXX 50® Index.

Table 3: Returns of spot European equity indexes and VSTOXX® spot index during each of the volatile periods when

the EURO STOXX 50® Index declined from peak to trough

5.0%

2.5%

0.0%

-2.5%

-5.0%

-7.5%

DAX® STOXX® Europe 600 CAC 40 EURO STOXX 50®

8 Apr 16

15 Apr 16 22 Apr 16 29 Apr 16 6 May 16 13 May 16 20 May 16 27 May 16 3 Jun 16 10 Jun 16 17 Jun 16 24 Jun 16

Chart 4: 5-day rolling returns of European equity index front month futures contracts prior and post the Brexit vote (23 May 2016)

Financial Crisis

167%

–60%

–59%

–61%

–54%

–60%

Greek Debt Crisis

106%

–18%

–18%

–6%

–6%

–10%

European Debt Crisis

172%

–35%

–31%

–17%

–32%

–25%

Chinese Financial Turmoil

87%

–21%

–17%

–18%

–24%

–18%

Brexit

72%

–14%

–13%

–12%

–11%

–12%

VSTOXX®

EURO STOXX 50® Index

CAC 40

FTSE 100 (in EUR)

DAX®

STOXX® Europe 600

Source: Bloomberg data

20

45%

30%

15%

0%

-15%

30%

DAX®STOXX® Europe 600VSTOXX® CAC 40EURO STOXX 50®

8 Apr 16

15 Apr 16 22 Apr 16 29 Apr 16 6 May 16 13 May 16 20 May 16 27 May 16 3 Jun 16 10 Jun 16 17 Jun 16 24 Jun 16

Chart 5: 5-day rolling returns of European equity index front month futures and VSTOXX® Futures front month prior and

post the Brexit vote (23 May 2016)

In summary, when examining the correlations either as a static metric or as a rolling metric, the correlations of the European equity indexes tend to maintain a high positive correlation frequently above 0.8 to the EURO STOXX 50® Index. During the various volatile periods the equity indexes tended to peak, decline and bottom around the same time. On the flipside,VSTOXX® volatility index tends to maintain a relatively high negative correlation to these respective equity indexes.

When viewing the most recent macro event (Brexit), on a rolling 5-day return, the returns tended to behave in similar fashion to each other leading up to and post the Brexit vote.Combining all of these results strongly suggests an investor with exposure to one or many of these European equity indexes may find an added value in utilizing VSTOXX® Futures to reduce portfolio tail risk and correlation risk.

21

In past articles I’ve discussed the various behaviors of

the VSTOXX®/VIX spread. This article follows my last article

“Utilizing a European volatility index for Pan-European

volatility” examining VSTOXX® behavior in recent volatility

events relative to various European equity indexes.

The Brexit election and the U.S. election are now behind us.

Several European elections are on the horizon in 2017.

And there doesn’t seem to be a shortage of ideas being

discussed for potential future macro volatility events. This

article examines the behavior of the VSTOXX®/VIX spread

during recent volatility events. Could the understanding

of the spread’s behavior during past volatility events offer

some insight for future events?

Liquidity is always important to an investor or trader.

Table 1 gives readers an overview of the VSTOXX® Futures

liquidity over the last years.

Trading a spread is just another way of saying trading relative

value. An investor is simply going long one product and

short another product as they are seeking the spread price

or price differential between the two products to either

widen or narrow based on the position they are holding.

In the case of the VSTOXX®/ VIX spread a trader may

go long VSTOXX® Futures and short VIX futures when

the spread price is oversold or sitting at or near the bottom

of the range. A trader may sell VSTOXX® Futures and

buy VIX futures when the spread is near the high end of

the range or considered overbought and finding resistance.

Since 2 January 2007, the VSTOXX®/VIX spot spread

averages an estimated premium of 4.5 volatility points of

VSTOXX® over VIX. The spread has traded below 2 about

19 percent of the time. The spot spread trades at negative

prices about 7 percent of the time. Therefore it is a low

probability for the spread to remain negative for an extended

period of time. When the spread is negatively priced it

tends to be more of a spike versus a sustained period of time.

When the VSTOXX®/VIX spread rallies it also tends to spike

to the upside and it usually doesn’t sustain high price levels

for extended periods of time. Since 2007, the spot spread

price has been above 8, 11 and 14 about 14 percent,

3 percent and 0.7 percent of the time respectively. Just prior

and during the financial crisis was the only period since

2007 the spread remained negative for a prolonged period

of time as noted in Chart 1.

Part 2: VSTOXX®/VIX volatility spreadbehavior during recent volatility events

Table 1: VSTOXX® Futures yearly volume and open interest as of Oct 2016

Total volume

7,908,599

7,226,833

6,962,188

5,324,708

3,901,530

1,889,492

431,669

14,715

YOY change

28.8%

3.8%

30.8%

36.5%

106.5%

337.7%

2,834.0%

12.0%

Daily average volume

36,956

28,341

27,519

21,046

15,300

7,352

1,686

58

Open interest

290,901

108,132

173,986

184,900

224,061

68,088

58,700

1,304

2016

2015

2014

2013

2012

2011

2010

2009

Source: Eurex Exchange monthly statistics

22

20

15

10

5

0

-5

-10

-15

Jan 2007

1

Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

European banks in need of financial aid

S&P cuts Greek debt to junk

Rumors over a possible bank withdrawal freeze in Greece

NBER announced the U.S. economy official recession

Dow opened 1,000 points down

Rumors of possible Greek default

Brexit

Chart 1: Spread price of VSTOXX®/VIX spot index spread 1 Jan 2009 to 9 Nov 2016

Source: Bloomberg data

Often, when the VSTOXX®/VIX spread widens, it is due to

one of the below items occurring:

1) EURO STOXX 50® Index declines, causing VSTOXX®

volatility index to rally while the VIX may remain relatively

stable thus causing a widening spread price.

2) S&P 500 index rallies causing the VIX index to decline

while VSTOXX® remains relatively stable equating to

a widening spread.

3) S&P 500 index declines and the EURO STOXX 50® Index

declines causing both the VSTOXX® and VIX indexes to

rally. However, VSTOXX® will often rally at an accelerated

rate versus VIX thus widening the spread.

The VSTOXX®/VIX spread may be utilized as a sentiment

indicator. If the spread is oversold or overbought it could

give an indication of how the individual volatility indexes

may behave in the near future to either narrow or widen

the spread price. A second derivative analysis of the spread

may imply that if the volatility indexes should move, it could

be a signal for direction of the respective underlying equity

markets. For example if the spread is priced above 11,

it would be considered very wide with an increased probability

for either VSTOXX® Futures or VIX futures to move to

narrow the spread and what that may imply about the under-

lying equity market?

Chart 2 shows the spot price of VSTOXX® and VIX indexes

along with VSTOXX®/VIX spot spread. This gives a macro

picture of how the VSTOXX®/VIX spread has behaved over

time. The spread tends to widen when the underlying

volatility indexes rally.

Chart 3 observes the 2008 rally of the volatility indexes

while the spread was frequently negative during that time.

This is one of the few times the VSTOXX®/VIX spread

sustained a negative price for an extended period of time.

Chart 3 also shows when the volatility indexes have large

moves, the spread tends to remain within a range that

is relatively common within its price distribution. As the vola-

tility indexes gradually drifted lower in 2009, the spread

was still hovering around the low single digits.

23

90

80

70

60

50

40

30

20

10

0

-10

-20

Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

VIXVSTOXX® Spread

Chart 2: Daily spot price of VSTOXX® and VIX indexes and VSTOXX®/VIX spot spread 2 Jan 2007 to 9 Nov 2016

90

80

70

60

50

40

30

20

10

0

-10

-20

Jan 2008

VIXVSTOXX® Spread

Jan 2009Jul 2008 Jul 2009Apr 2008 Apr 2009Oct 2008 Oct 2009

Chart 3: VSTOXX®/VIX daily spot spread price 2 Jan 2008 to 31 Dec 2009

Source: Bloomberg data

Source: Bloomberg data

24

50

40

30

20

10

0

Jan 09

VIX Futures VSTOXX® Futures Spread Futures

Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15

Jul 16

Chart 4: Daily prices of VSTOXX® Futures, VIX futures and VSTOXX® Futures/ VIX futures spread 2 Jun 2009 to 9 Nov 2016

Table 2 lists the average, median, maximum and minimum

VSTOXX®/VIX spread price and the frequency of how often

the spread price is either above or below a specific spread

price. For example, 0.8 percent of the time the spot spread

price is above 14. The pricing and the frequency of spot

versus futures VSTOXX®/VIX spreads are similar. VSTOXX®

Futures began trading 2 June 2009, which is the starting

date of this analysis to compare the spread statistics of the

spot price to the futures price.

Chart 4 shows the daily prices of VSTOXX® Futures, VIX

futures and VSTOXX® Futures / VIX futures spread since

inception of the VSTOXX® Futures contract. It is very similar

to the spot prices in Chart 2.

27 April 2010 Standard and Poor’s downgraded the Greek

debt to junk and downgraded the sovereign debt of

Portugal. It was only a few weeks earlier the Greek debt was

previously downgraded1. As this occurred both volatility

indexes rallied, but VSTOXX® Futures lead the way and

maintained a widening premium over VIX futures causing

the spread to go from 2.72 on 21 April 2010 to exceed

a spread price of 10 by 7 May 2016.

A spread price in the teens is considered a tail event and

usually is difficult for that price to be sustained for an extended

period of time (as noted in Table 2). In Chart 5 the price

traded in a range around 10 to a range around 5 a few times

before finally narrowing. By 19 May 2010 the volatility

indexes peaked and began a slow decline into the summer

months. And the spread also declined into early July.

In the spring /early summer of 2015 the spread was gradu-

ally widening (Chart 6 ) due to rumors of controls on

the Greek banks. During this time VIX futures remained stable

hovering around 15 while VSTOXX® Futures traded both

higher and lower due to the increased European uncertainty.

This triggered the VSTOXX®/VIX spread to widen and narrow.

Table 2: Statistics of daily spot and front month futures of VSTOXX®/VIX spread 2 Jun 2009 to 9 Nov 2016

Avg

5.5

4.7

Median

5.0

4.4

Max

20.53

17.78

Min

–2.70

–1.88

<0

0.9%

0.7%

<2

7.5%

10.9%

>8

18.9%

10.2%

>11

3.6%

0.8%

>14

0.8%

0.1%

Spot

Futures

1 http://money.cnn.com/2010/04/27/news/international/Greece_debt_downgraded/index.htm

Source: Bloomberg data

Source: Bloomberg data

25

35

30

25

20

15

10

5

0

Spread FuturesVSTOXX® Futures VIX Futures

Mar 2015

Apr 2015 May 2015 Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015

Possible Greek bank withdrawal freeze

DJIA opens 1,000 points lower

Chart 6: Daily prices of VSTOXX® Futures, VIX futures and VSTOXX® Futures / VIX futures spread 3 Mar 2015 to 31 Dec 2015

Monday 24 August 2015 the Dow Jones Industrial Average

opened 1,000 points lower. The declining U.S. equity markets

triggered a decline in global equity markets and rallying of

volatility indexes. The VSTOXX® Futures/VIX futures spread

came close to going negative at 0.925 on 25 August 2015.

The price of the spot spread actually did go negative at

–2.3715. This narrowing of the spread may be attributed

to the VIX futures rallying faster than VSTOXX® Futures.

As noted in Table 2 the futures spread price is negative

0.7 percent of the time. Only 11 percent of the time is the

futures spread priced below 2. The price didn’t remain low

for long. By 2 September 2015, the spread price rallied above

5 as VIX futures declined faster than VSTOXX® Futures.

45

40

35

30

25

20

15

10

5

0

Spread Futures VSTOXX® Futures VIX Futures

Jan 2010

M

Feb 2010 Mar 2010 Apr 2010 May 2010 Jun 2010 Jul 2010

S&P cuts Greek debt to junk

Chart 5: Daily prices of VSTOXX® Futures, VIX Futures and VSTOXX® Futures/ VIX Futures spread Jan to Jul 2010

Source: Bloomberg data

Source: Bloomberg data

26

45

40

35

30

25

20

15

10

5

0

Mar 2016

Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016

Brexit

Spread FuturesVSTOXX® Futures VIX Futures

Chart 7: Daily prices of VSTOXX® Futures, VIX futures and VSTOXX® Futures/ VIX futures spread 1 Mar 2016 to 31 Oct 2016

Source: Bloomberg data

One of the top trending words in 2016 was “Brexit”2. Brexit,

a referendum on 23 June 2016 to determine if U.K. citizens

wanted to leave the European Union (EU) was forecasted

by polls and betting sites to stay in the EU. In April and

May 2016, VIX futures remained relatively stable in the range

of 15 to 17. However VSTOXX® Futures traded in the range

of the low 20s to the high 20s. As time moved closer to the

day of election, the VSTOXX®/VIX futures spread gradually

widened as VSTOXX® Futures moved higher.

VSTOXX® Futures peaked 15 June 2016 at 37.62. The spread

also peaked at 17.72. Once the votes were cast, the result

was to leave the EU; a surprise to many. The equity markets

reacted with fast declines. As both volatility indexes rallied,

the spread remained capped in the 8 to 10 range. The down-

side volatility diminished after the initial sell off and

both volatility indexes gradually moved lower and the

spread narrowed.

In discussing the VSTOXX®/VIX futures spread, there is

a mechanical component that has to be derived to deter-

mine how many futures contracts need to be entered

for each leg of the spread. There is a difference in the size

of the two futures contracts. One volatility point in VSTOXX®

Futures = EUR 1003.Whereas, one volatility point in VIX

futures = USD 1,0004.Without adjusting for foreign exchange

differentials, a VSTOXX® Futures contract value is 1/10

the size of a VIX futures contract.

2 https://www.google.com/trends/explore?q=brexit3 http://www.eurexchange.com/blob/269082/3860c6d6df82b8b2e42b46ef02043a49/data/factsheet_eurex_vstoxx_derivatives.pdf4 http://cfe.cboe.com/products/spec_vix.aspx

27

Table 3: Conversion ratio of the number of VSTOXX® Futures to VIX futures

USD

USD 1.50

USD 1.40

USD 1.30

USD 1.10

USD 1.05

USD 1.00

USD 0.95

USD 0.90

USD 0.85

Ratio

0.667

0.714

0.769

0.909

0.952

1.000

1.053

1.111

1.176

Multiplier

10

10

10

10

10

10

10

10

10

VSTOXX® Contracts

6.67

7.14

7.69

9.09

9.52

10.00

10.53

11.11

11.76

EUR

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

EUR 1.00

Source: Shore Capital Research LLC

Table 3 calculates the ratio of how many VSTOXX® Futures

contracts are needed for the spread per each VIX futures

contract and adjusting for foreign exchange. For example if

EUR and USD were at par, the ratio would be 10 VSTOXX®

Futures contracts are required for each VIX futures contract

in the spread. As the USD appreciates versus the EUR,

the ratio increases. As the USD depreciates versus the EUR

the ratio of VSTOXX® Futures contracts needed per each

VIX futures contract decreases.

In summary, VSTOXX®/VIX spread tends to maintain similar characteristics from one macro volatility event to the next. A spread price below 2 is considered support and may offer opportunities to buy the spread or unwind a short spread with the exception of the financial crisis. When the spread is priced in the high single digits or higher it is considered resistance and may be an opportunity to sell the spread or unwind a long position. Often the spread will move higher as VSTOXX® Futures leads the rally of the two volatility indexes. Analyzing how the VSTOXX®/VIX spread behaves during macro volatility events may offer some insight for future macro volatility events.

28

Why replace VSTOXX® options with options onVSTOXX® Futures? As appetite for European Volatility continued to grow in

2016, U.S. participants have expressed interest in accessing

listed VSTOXX® options. The current version is under

the jurisdiction of the SEC and not available to trade in

the U.S. However, some U.S. market participants trade

VSTOXX® options on the OTC market, making the Eurex

listed VSTOXX® options a secondary market. Under the SEC

no-action relief VSTOXX® options are only available

to a Qualified Institutional Buyer (QIB), not allowing

for direct market access. The new CFTC-certified OVS2

will allow for wider market participation.

Highlights of the OVS2 contract specifications include:1) EUR denominated

2) Currently the OVS contract has a European-style exercise

OVS2 will be American style exercise, allowing the option

to be exercised anytime during the life of the contract.

3) Currently the OVS is cash settled. The new OVS2 contract

will be physically delivered to a VSTOXX® Futures

contract that expires on the same day. VSTOXX® Futures

are cash settled.

Part 3: Introduction of CFTC-certifiedoptions on VSTOXX® Futures

Table 1: VSTOXX® Futures yearly volume and open interest as of Nov 2016

Total volume

9,030,160

7,226,833

6,962,188

5,324,708

3,901,530

1,889,492

431,669

14,715

YOY change

35.9%

3.8%

30.8%

36.5%

106.5%

337.7%

2,834.0%

12.0%

Daily average volume

38,263

28,341

27,519

21,046

15,300

7,352

1,686

58

Open interest

269,249

108,132

173,986

184,900

224,061

68,088

58,700

1,304

2016

2015

2014

2013

2012

2011

2010

2009

Source: Eurex Exchange monthly statistics

On 1 February 2017, Eurex Exchange will introduce a new CFTC-certified options on VSTOXX®

Futures contract (OVS2). The VSTOXX® Futures volatility index will be the underlying market for the new options contract. OVS2 will have eight consecutive expiring months. The underlyingequity market for VSTOXX® Futures is the EURO STOXX 50® Index.

Since the inception of VSTOXX® Futures in 2009, volume

and open interest continues to grow as noted in Table 1.

In 2016 VSTOXX® Futures experienced some days and

months of large volume and open interest. The most

salient example occurred around the Brexit referendum.

Total contracts traded in June 2016 were 1.24 million.

A 62.1 percent increase from a year earlier and a 62.4

percent increase from the previous month. The futures

volume experienced another increase recently around

the U.S. election on 8 November 2016 and again leading up

to Italy’s constitutional referendum on 4 December 2016

resulting in a 1.12 million contracts traded in November

2016 for a 120.7 percent increase from a year earlier

and a 37.1 percent increase from the previous month.

In 2012 Eurex began trading VSTOXX® options (OVS)

with the VSTOXX® index as the underlying market. When

OVS2 begins trading in February 2017, initially both option

contracts will trade simultaneously. As of 1 February 2017,

the listing of new expiration months for VSTOXX® options

(OVS) will be discontinued1. As each new OVS2 expiration

month is introduced, the OVS options will be gradually

phased-out during the eight-month period2. By the end of

the eight months OVS will be completely replaced by OVS2.

1 https://www.eurexchange.com/blob/2766088/12a844b3191c02d89d15bf094e920018/data/er16098e.pdf2 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/New-U.S.-Approved-VSTOXX-Options-To-Launch-February/2774230

29

Source: Eurex

Key Benefits1. Investors with EUR denominated equity exposure

do not have currency risk and exposure.

2. As a CFTC-certified product it is directly accessible

to all U.S. traders and investors. Currently the OVS

contracts are only available to QIBs.

3. It offers investors a targeted and leveraged channel to

reflect their views on EURO STOXX 50® Index volatility.

4. As the research showed in my paper “Utilizing a European

volatility index for Pan-European volatility” (page 15),

VSTOXX® Futures may be employed for volatility

of several European equity indexes and therefore

options on VSTOXX® Futures could also be applied for

the same goal.

5. In several articles, I’ve discussed the VSTOXX®/VIX spread.

Now you can trade options on the VSTOXX® leg of the

futures spread instead of only utilizing a futures contracts.

6. OVS2 offers opportunities to deploy strategies that utilize

both futures and options.

7. Options on VSTOXX® Futures features the same benefits

of any exchange traded contract:

– Market-to-Market transparency.

– Offering liquidity for hedgers and investors.

– Regulated exchange and market.

– Central clearing of transactions: reducing counterparty

default risk.

– Price discovery of the market.

– Standardized trading hours and contract specifications.

Table 2 notes a greater detail of comparison between

the current OVS and the new OVS2 options.

OVS

VSTOXX® Options

The VSTOXX® Index

EUR 100 per VSTOXX® Index point

In points with two decimal places. The minimum price change is 0.05 points (equivalent to a value of EUR 5).

The next eight successive calendar months

European-style; an option can only be exercised on the final settlement day of the respective option series until 21:00 CET.

Premium-style

Cash settlement, payable on the first exchange day following the final settlement day.

Established by Eurex, determined through a binomial pricing model.

On the expiration day of the underlying futures contract, which is 30 calendar days prior to the third Fridayof the expiration month of the underlying options. This is usually the Wednesday prior to the second lastFriday of the respective expiration /maturity month, unless this is not an exchange trading day. In this case itis the day before.

8:50 –17:30 CET

Available for European-style exercise and cash settlement (OV6S)

0.30 EUR (on book)0.30 EUR (off book)

500 contracts

Symbol

Product name

Underlying

Contract value

Price quotation and minimum price change

Contract months

Exercise

Margin

Settlement

Daily settlement price

Last trading day and final settlement day

Trading hours

Flex functionality

Fees

Block trade size

Table 2: Comparing contract specifications between VSTOXX® options (OVS) and options on VSTOXX® Futures (OVS2)

OVS2

Option on VSTOXX® Futures

VSTOXX® Futures

American-style; an option can be exercised until the end of the post-trading full period on any exchange day during the lifetime of the option.

Futures-style

Futures settlement, options settle into futures andimmediately settle into cash, payable on the firstexchange day following the final settlement day.

30

When volatility begins to show up in the VSTOXX® index,

it tends to experience greater moves in the spot, front

and nearby futures months than what is often experienced

in the back months as the curve moves from contango

to backwardation (spot is priced higher than back months)7.

1) An investor could buy calls in the front month and buy

puts in the back months with the expectation of

a larger move in the front month versus the back month

if the market is in contango.

2) An investor could buy calls in the front month and sell

puts in the back months. Similar to strategy No. 1,

but realizing the entire curve could move higher if the

market goes from contango to backwardation allowing

the investor to receive some premium for selling the put.

3) The investor could sell puts in the front month to receive

some premium and the expectation the front month may

move higher.

4) An investor could buy puts in the back months as the price

of the back months may decline as they move closer to

expiration assuming a contango term structure.

5) If the futures term structure is in backwardation for

an extended period of time, an investor may determine

if they should either buy puts or sell calls in the front

month or nearby month with the perspective of the

VSTOXX® Futures potentially moving lower.

Per the BNP Paribas SA Eurozone Political Risk Index,

political risk is increasing in Europe while the VSTOXX®

index declined in the past several weeks3. This plays

into potential future macro events related to the upcoming

European elections.

In a 24 November 2016 ECB press release of their semi-

annual Financial Stability Review discussing “systemic risks

to financial stability over the next two years”, one of the

four risks included financial contagion induced by increased

“political uncertainty in advanced economies and continued

fragilities in emerging markets”4.

The November Centre-right primaries in France could be

considered the beginning of the election season across

the EU for the next year. Followed quickly by the Italian

constitutional referendum and the Austrian Presidential

election both held 4 December 2016. Over the course of

the next year general elections will be held in the Nether-

lands, France and Germany. September 2017 a referendum

is planned for Catalonia’s independence from Spain5.

2017 could see changes in European heads of state and

controlling parties of various governments. Could this

sustained uncertainty induce more volatility and nervousness

into the European capital markets and potentially develop

macro events? If so, how could these events or increased

uncertainty impact VSTOXX® Futures and options on

VSTOXX® Futures?

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). As discussed

in my article “Forward curves of European and U.S.

volatility index futures” the first three months of VSTOXX®

Futures are in backwardation about 15 percent of the time6.

3 https://www.bloomberg.com/news/articles/2016-11-23/europe-stock-volatility-underprices-rising-political-risk-chart4 http://www.ecb.europa.eu/press/pr/date/2016/html/pr161124.en.html5 http://www.marketwatch.com/story/all-the-potential-political-risks-looming-in-europe-in-one-chart-2016-11-146 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/689758/forward-curves-of-european-and-us-volatility-index-futures/?wt_mc=group.newsletter.editorial_vstoxx_en.vstoxx_outlook_2013_11_2013-11-05-21:43_690736

7 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/vstoxx-volatility-behavior-when-european-equities-rally/1176180/?wt_mc=ussm.LinkedIn.vstoxxnl.en.ms.vstoxxnl12172014

31

32.00

30.00

28.00

26.00

24.00

22.00

20.00

10.00

16.00

14.00

1

Backwardation

6 Oct 2014 16 Oct 201410 Oct 201419 Jun 2014 19 Sep 2014

2 3 4 5 6 7 8 9

Contango

Chart 1: Evolution of the volatility regime shift of VSTOXX® spot and VSTOXX® Futures

Source: Shore Capital Research LLC

Chart 1 illustrates a general guideline how the VSTOXX®

Futures term structure may shift from contango to back-

wardation. Even though the entire curve moved higher

as market sentiment shifted towards more uncertainty,

the implied volatility may move quickly in VSTOXX® spot

and the front months of VSTOXX® Futures as discussed

in my article “An analysis of why volatility indexes

are relevant”.

VSTOXX® spot is the first moment in Chart 1. The front

month of VSTOXX® Futures is the second moment.

The remainder of the term structure are three through nine.

During the summer of 2014, EURO STOXX 50® Index moved

from a rallying market to choppy market and then selling

off into the fall of 2014. The VSTOXX® Futures structure

followed the views of the equity market. In June 2014, the

VSTOXX® term structure was in contango. By October 2014,

VSTOXX® Futures term structure shifted to backwardation.

In summary, options on VSTOXX® Futures will allow for greater market participation and greaterchoices of strategies for hedgers and investors for directional trading, spreading or as a hedge totheir portfolio and trading volatility.

32

Prior to founding Shore Capital Research, Mr. Shore was

Head of Risk for Octane Research Inc (USD 1.1 billion AUM)

in NYC, where he was responsible for quantitative risk

management analysis and due diligence of Fund of Funds.

He chaired the Risk Management Committee and was

a voting member of the Investment Committee.

Prior to joining Octane, he was the Chief Operating Officer

of VK Capital Inc, a wholly owned Commodity Trading

Advisor unit (USD 250 million AUM) of Morgan Stanley.

Mr. Shore provided research and risk management expertise

on portfolio construction, product development and

business strategy. Mr. Shore graduated from DePaul

University with a degree in Finance. He received his MBA

from the University of Chicago.

About Mark Shore Mark Shore has more than 25 years of experience in

the futures markets and managed futures, publishes

research, consults on alternative investments and conducts

educational workshops. His research is found at

Shore Capital Research LLC www.shorecapmgmt.com.

Mr. Shore is also an Adjunct Professor at DePaul University's

Kellstadt Graduate School of Business where he teaches

a graduate level managed futures /global macro course.

He is a board member of the Arditti Center for Risk Manage-

ment at DePaul University. Mr. Shore is a frequent speaker

at alternative investment events. He is a contributing writer

for Eurex Exchange, Reuters HedgeWorld, the CBOE

Futures Exchange (CFE) and Micro-Cap Review.

Articles –Real life applications

These are the great real life illustrations of what has been discussed in Part 1. Articles cover hedging strategies, directional, spreading and event-driven trading.

34

Manceau noted that although some investors

are still actively trading the spread, the current levels

make it difficult to capture the entire range.

“The spread effectively showed potential this year and

went to unseen territories by printing above 20.

Spread is now sitting around 8 which is still the highs

of the historic range if you back test it. It has some

downside potential and can compress to sub-4 if realised

volatility continues to be low. A lot of people that

were active in the spread don’t want to get in right

“It’s a smart way to be long risk but given that trade

involves selling vol of vol it’s not as attractive from

a vol standpoint as the vol of vol is quite low now on

the VSTOXX®. These are pure directional plays to

get long without spending any premium,” said Gabriel

Manceau, VSTOXX® trader at Morgan Stanley

in London. As reported by EQDerivatives earlier this

month, there is continued interest from portfolio

managers in the VSTOXX®/VIX spread with the term

structure in the former index largely flat versus

an upward sloping term structure in the latter index.

Robert McGlinchey: Directional VSTOXX® Options flow spikes on Friday as event risk grows nearerPublished: 26 July 2016 | Eurex Exchange

Portfolio managers were active in upside VSTOXX® structures in Nov. and Dec. maturities on Fridayin the expectation of a higher volatility regime in Europe for the rest of the year as local event risk including the Italian Referendum and the publication of the latest E.U. bank stress tests growsnearer. Two sizeable option trades in the VSTOXX® were executed on Friday, with investors activelybuying Nov. and Dec. call spreads to sell puts. Traders also highlighted interest in naked call buyingin the VSTOXX® as directional positioning increased going in to the afternoon session.

About Robert McGlinchey

Robert is director and co-founder of EQDerivatives, Inc.

Previously derivatives editor of GlobalCapital, and managing

editor of Derivatives Week, Euromoney Institutional

Investor, Robert has covered the derivatives market across

all asset classes in the Americas, Europe and Asia Pacific.

Robert has experience in launching a host of leading

derivatives events and supplements, as well as surveys and

rankings. He regularly chairs industry conferences focused

on the equity derivatives market and industry regulation.

A graduate of St. Mary’s College, University of Surrey,

he’s based in London.

35

investors an attractive instrument to hedge event risk

in Europe, even though the average vega traded via

VSTOXX® instruments up to six month tenors compared

to EURO STOXX 50® Options is around 10 percent.

“The VSTOXX® offers another alternative to investors and

some people have taken advantage of the opportunities

in the product. For example, July Options in SX5E were only

listed last month but the VSTOXX® June Future had been

trading well before that, so you could have put a position

specifically around a July event using June Futures before

the EURO STOXX® Options were available,” noted Deb.

Aside from Futures spread trading in the VSTOXX® and

directional options positioning in the product, flow

in strategies to participate in the VSTOXX®/VIX spread

has remained subdued. Deb added that although you

could view the VSTOXX®/VIX spread as having moved

to a higher average, the depressed level of volatility

in the U.S. may deter some investors.

Abhinandan Deb, head of EMEA equity derivatives research

and cross-asset quantitative investment strategies at Bank

of America and Merrill Lynch in London, told EQDerivatives

that the June expiry, for example, has seen a vol differential

to its neighbouring expiries being more than four vol points,

which is a rare occurrence.

“A lot of people have been curious around the big kink

in the VSTOXX® curve. Before this kink got that big, i.e. two

months ago, there was little difference between the May

and the June future, but in mid-April, the June vs. May

future spread rose to more than four vol points. Spread

trading in VSTOXX® Futures has afforded another way for

investors to position for the risk of Brexit,” said Deb.

Over the last week, investors have increasingly been rolling

protection out to September in the EURO STOXX 50®,

targeting not only the potential of Brexit, but also risk

surrounding central bank meetings and the Spanish general

election. The VSTOXX®, however, is continuing to offer

According to latest monthly statistics from Eurex,

685,705 VSTOXX® options contracts were trading in June,

up from 250,011 in May. In VSTOXX® futures,

meanwhile, 1,241, 817 contracts were traded in June,

up from 764, 674 contracts in May.

At close on Friday, the VSTOXX® sat at 19.11,

according to Bloomberg.

now and are waiting for better levels. They are also

waiting for a dip in the U.S. where the VIX will react

violently and make the spread flat, which is what

happened in 2015. That’s where people will want to put

the trade on. So at the moment, you have to be careful

playing this spread,” added Manceau.

VSTOXX® Futures spreads garner interest as key events nearPublished: 12 May 2016 | Eurex Exchange

Portfolio managers have shown increased interest in trading VSTOXX® Futures spreads in an effortto profit from the vol differential between monthly expiries. Although the EURO STOXX 50®

continues to be used primarily to hedge event risk, others are finding greater value in using the VSTOXX® as a way of positioning around the E.U. referendum. Elsewhere, investors are showinggreater interest in 1�2 put ratios on VSTOXX® June Futures.

36

About EQDerviativesEQDerivatives, Inc. is a research and commentary provider

focused on the institutional equity and volatility derivatives

market. Our content is delivered to the buyside, sellside and

asset owners.

We deliver detailed, high-quality commentary and research

that clients can use to make sense of what is moving the

market now. Our research will sharpen business development

for product providers and their customer acquisition and

retention strategies.

“The U.S. equity market has recently flirted with all-time

highs, but that’s not the case with the European market.

There are people that expect a higher average level in

the VSTOXX®/VIX spread, but get concerned that the VIX

has been ultra low as they are somewhat sceptical of

further U.S. market upside. So there will be some hesitation

in investors acting upon expecting a higher VSTOXX®/VIX

average,” said Deb.“That’s not to say that the trade is

not profitable and people are still looking at it as a technical

and more strategic trade.”

Separately, hedge funds and institutional investors are

showing interest in 1�2 put ratios on June VSTOXX®

Futures after the recent vol rally in Europe. It followed

a JPMorgan research report highlighting that June Futures

have been trading around 28 in recent days with a rally

unlikely to go beyond 30 as it would coincide with

a recessionary scenario. The downside for the VSTOXX®

is likely to be higher than 20, meanwhile, as June Futures

are bounded below by the EURO STOXX 50® June-July

forward volatility, which will be well supported due to

the E.U. referendum, the report noted.

37

Guyon, is recommending investors sell VSTOXX® November

puts to buy VSTOXX® December 26/30 call spread. The view

from Société Générale is that the Nov. VSTOXX® contract will

continue to trade at elevated levels while the Dec. futures

should spike on a ‘no’ vote outcome in the referendum.

“It makes sense to sell a VSTOXX® November put as it expires

before the result. As the polls are very close, we are confident

the VSTOXX® won’t reset below the put strike at least until

the election day. On the other hand, by being long the call

spread of VSTOXX® December you will be able to benefit

from a spike in volatility that could occur after the election

if the ‘no’ vote wins. Looking back at Brexit, a similar

structure, trading near flat premium, would have been

in the money post referendum result,” added Guyon.

During Friday morning trading, the VSTOXX® was trading

at 21.1, according to Bloomberg.

A strategy to sell a VSTOXX® Nov. put option to fund

the purchase of a VSTOXX® December call spread is pricing

attractively as a hedge against the potential of heightened

volatility surrounding the upcoming Italian referendum.

The Italian Constitutional Referendum, which is set to take

place sometime in November, is aimed at reducing the

fragmentation in Italian politics. Prime Minister Matteo Renzi,

is confident that the upcoming referendum will not mirror

Brexit. However, the Italian media are reporting Renzi is likely

to push back the vote due to polls showing a majority ‘no’

vote. He has released a statement setting out that that he

will quit his position if he loses the referendum later this year.

“We’ve seen that the polls have been increasingly showing

the ‘no’ vote as a possible outcome for this referendum.

Therefore, we think that there is an inkling that the vote

could create additional political troubles in Italy and impact

on the rest of Europe,” said Herve Guyon, from Flow

Strategy and Solutions team at Société Générale in London.

Georgia Reynolds: EMEA: Selling Nov. VSTOXX® put to buyDec. call spread pricing attractivelyPublished: 22 August 2016 | Eurex Exchange

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.

.

38

think that the uncertainty premium around the U.S. election

will likely provide support to the October VIX future

so we are happier selling puts there.”

According to BAML research, V2X Oct roll-down is currently

more attractive than usual compared to VIX roll-down.

In fact, VIX roll-down is typically more lucrative, motivating

systematic long VSTOXX® short VIX futures strategies.

Deb is recommending clients to trade long 895 contracts

of V2X Oct16 21 puts (~90%, fut ref: 23.25) per

1,000 contracts of short VIX Oct16 16 puts (~90%, fut ref:

17.45) for a small upfront credit (equal $vega sizing).

“If you go long VSTOXX® October puts like we are recom-

mending tactically, you benefit from potential roll-down or

a decline in the VSTOXX® future,” added Deb. He continued

to explain: “The reason we are doing this is because

we think that the Italian referendum no longer has a direct

bearing on the October future for VSTOXX® whereas

it does for the November contract. If we do see a risk on

equity rally before then, then there is a great deal of carry

to be had from rolling down the VSTOXX® future in

the coming weeks.”

Greater clarity on the Italian referendum date has created

a tactical opportunity to trade VIX/VSTOXX® relative value,

specifically by going long VSTOXX® puts and short VIX

puts in October maturities. The VSTOXX® Oct futures will

unlikely be directly impacted, while the VIX Oct futures

will likely be supported given U.S. elections according to

Bank of America Merrill Lynch.

VIX futures in October are screening historically low

vs. VSTOXX® Oct futures despite the VIX October future

settling to volatility encompassing the U.S. election.

Given relatively low realized volatility over the summer

in both markets, the front end of both VIX and VSTOXX®

curves have been pinned down, with record roll down

in the VSTOXX® future relative to the VIX according to

Abhinandan Deb, head of EMEA equity derivatives

research and cross-asset quantitative investment strategies

at Bank of America Merrill Lynch in London.

“Our tactical view is that we prefer buying puts on the

VSTOXX® October future and selling puts on the October

VIX future,” said Deb. He continued: “This is because we

Italian referendum date clarity adds to favorable long VSTOXX® short VIX RV playPublished: 26 September 2016 | Eurex Group, Eurex Exchange

elevated April 2017 contract. The difference in implied

volatility between VSTOXX® Jan. 2017 expiry and April 2017

is greater than three volatility points and 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

Despite near term macro risks, such at the Italian con-

stitutional 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

VSTOXX® term structures at three yearhighs, despite macro risksPublished: 3 November 2016 | Eurex Exchange

39

Bennett is specifically recommending going long Jan-17

futures vs. short 2� 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 2�

Apr-17 against each 1� 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 2� Apr-17

against each 1� 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 5.4� 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.

to keep in line with EU 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 candi-

dates with the most votes. Both elections have the potential

to fundamentally change the nature of the EU. 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,

explained the 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.

Upon forming the spread, investors can capitalize on

the steep roll-down of VIX futures (relative to VSTOXX®)

while managing their risk with European volatility partially

hedging the exposure to curve shifts.

The spread strategy is often misunderstood by people

as being a directional strategy, but the performance is mostly

driven the relatively higher roll cost in U.S. volatility vs. EU

volatility, noted Christian Kober, European equity derivatives

strategist at Barclays in London. The futures shift, which

is a directional component related to the market, is essentially

unpredictable.

The Barclays VIX/VSTOXX® volatility futures spread strategy,

which has returned near 20% YTD, is expected to continue

to produce positive returns over the next month as high-

lighted by the firm’s timing signals.

The aim of the short SPVXSTR, long VST1MT strategy is

to harvest the relative term structure premium in VIX futures

vs. VSTOXX® futures. To do so, it sells a portfolio of VIX

futures with average maturity of 1M and buys a portfolio

of VSTOXX® futures with the same average maturity

in the same notional. In keeping the maturity constant, each

leg incurs a roll cost (which can be positive or negative).

The basic premise of the strategy is that the roll cost

is consistently higher in the VIX relative to the VSTOXX®.

Barclays signals show VIX/VSTOXX®

futures spread strategy to continue outperformingPublished: 14 September 2016 | Eurex Group, Eurex Exchange

40

Barclays continues to invest in the further development

of the strategy by adding trading signals. The idea is

to dynamically change the notional invested in the strategy

based on a relative volatility momentum signal.

Investors have been accessing the strategy through swaps,

with Kober adding that new clients are increasingly keen

to add exposure to the strategy.

“The relative roll income is consistent over time and com-

pensated the futures shift when it was detrimental to the

performance. Hence the experience this year is not unusual

and this is what you expect it to do,” said Christian Kober,

European equity derivatives strategist at Barclays in London.

Investors note that trading volatility between U.S. and

Europe systematically in the form of volatility futures

is innovative compared to many products from other dealers.

Contacts

For further information please contact

Sales Europe Vincenzo Zinnà T +41-43-430-7125

vincenzo.zinna@eurexchange.com

Sales United KingdomMurat Baygeldi T +44-20-78 62-72 30

murat.baygeldi@eurexchange.com

Sales U.S.Megan Morgan T +1-312-544-10 83

megan.morgan@eurexchange.com

Sales Buy Side U.S.Laurent Partouche T +1-212-309-93 02

laurent.partouche@eurexchange.com

Sales Asia & Middle EastJan Thorwirth T +852-25 30-78 07

jan.thorwirth@eurexchange.com

41

© Eurex 2017Deutsche Börse AG (DBAG), Clearstream Banking AG (Clearstream), Eurex Frankfurt AG, Eurex Clearing AG (Eurex Clearing) as well as Eurex Bonds GmbH (Eurex Bonds) and Eurex Repo GmbH(Eurex Repo) are corporate entities and are registered under German law. Eurex Zürich AG is a corporate entity and is registered under Swiss law. Clearstream Banking S.A. is a corporate entityand is registered under Luxembourg law. U.S. Exchange Holdings, Inc. is a corporate entity and is registered under U.S. American law. Deutsche Boerse Asia Holding Pte. Ltd., Eurex ClearingAsia Pte. Ltd. and Eurex Exchange Asia Pte. Ltd are corporate entities and are registered under Singapore law. Eurex Frankfurt AG (Eurex) is the administrating and operating institution of EurexDeutschland. Eurex Deutschland and Eurex Zürich AG are in the following referred to as the “Eurex Exchanges”.

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Eurex and Eurex Clearing offer services directly to members of the Eurex exchanges respectively to clearing members of Eurex Clearing. Those who desire to trade any products available on theEurex market or who desire to offer and sell any such products to others or who desire to possess a clearing license of Eurex Clearing in order to participate in the clearing process provided byEurex Clearing, should consider legal and regulatory requirements of those jurisdictions relevant to them, as well as the risks associated with such products, before doing so.

Eurex derivatives are currently not available for offer, sale or trading in the United States or by United States persons (other than EURO STOXX 50® Index Futures, EURO STOXX 50® ex FinancialsIndex Futures, EURO STOXX® Select Dividend 30 Index Futures, EURO STOXX® Index Futures, EURO STOXX® Large/Mid/Small Index Futures, STOXX® Europe 50 Index Futures, STOXX® Europe600 Index Futures, STOXX® Europe 600 Banks/Industrial Goods & Services/Insurance/Media/Travel & Leisure/Utilities Futures, STOXX® Europe Large/Mid/Small 200 Index Futures, Dow JonesGlobal Titans 50 IndexSM Futures (EUR & USD), DAX®/Mini-DAX®/MDAX®/TecDAX® Futures, SMIM® Futures, SLI Swiss Leader Index® Futures, MSCI World (FMWO, FMWP, FMWN)/Europe(FMED, FMEU, FMEP)/Europe Value/Europe Growth/Europe ex Switzerland/Emerging Markets (FMEM, FMEF, FMEN)/Emerging Markets Latin America/Emerging Markets EMEA/EmergingMarkets Asia/EMU/Frontier Markets/Kokusai (FMKG, FMKN)/AC Asia Pacific/AC Asia Pacific ex Japan/ACWI/Pacific ex Japan/Pacific (FMPG, FMPA)/Australia/China Free/Hong Kong/India/Indonesia/Japan (FMJP, FMJG)/Malaysia/Mexico/South Africa/Thailand/UK (FMUK, FMDK)/USA/ USA Equal Weighted/USA Momentum/USA Quality/USA Value Weighted IndexFutures, TA-25 Index Futures, Eurex Daily Futures on Mini-KOSPI 200 Futures, Daily Futures on TAIEX Futures, VSTOXX® Futures, EURO STOXX 50® Variance Futures as well as Eurex FX, propertyand interest rate derivatives).

Trademarks and Service MarksBuxl®, DAX®, DivDAX®, eb.rexx®, Eurex®, Eurex Bonds®, Eurex Repo®, Eurex Strategy WizardSM, Euro GC Pooling®, FDAX®, FWB®, GC Pooling®, GCPI®, HDAX®, MDAX®, ODAX®, SDAX®, TecDAX®,USD GC Pooling®, VDAX®, VDAX-NEW® and Xetra® are registered trademarks of DBAG. All MSCI indexes are service marks and the exclusive property of MSCI Barra. ATX®, ATX® five, CECE®

and RDX® are registered trademarks of Vienna Stock Exchange AG. IPD® UK Annual All Property Index is a registered trademark of Investment Property Databank Ltd. IPD and has been licensedfor the use by Eurex for derivatives. SLI®, SMI® and SMIM® are registered trademarks of SIX Swiss Exchange AG. The STOXX® indexes, the data included therein and the trademarks used in theindex names are the intellectual property of STOXX Limited and/or its licensors. Eurex derivatives based on the STOXX® indexes are in no way sponsored, endorsed, sold or promoted by STOXXand its licensors and neither STOXX nor its licensors shall have any liability with respect thereto. Bloomberg Commodity IndexSM and any related sub-indexes are service marks of Bloomberg L.P.PCS® and Property Claim Services® are registered trademarks of ISO Services, Inc. Korea Exchange, KRX, KOSPI and KOSPI 200 are registered trademarks of Korea Exchange, Inc. Taiwan FuturesExchange and TAIFEX are registered trademarks of Taiwan Futures Exchange Corporation. Taiwan Stock Exchange, TWSE and TAIEX are the registered trademarks of Taiwan Stock ExchangeCorporation. BSE and SENSEX are trademarks/service marks of Bombay Stock Exchange (BSE) and all rights accruing from the same, statutory or otherwise, wholly vest with BSE. Any violationof the above would constitute an offence under the laws of India and international treaties governing the same.

The names of other companies and third party products may be trademarks or service marks of their respective owners.

© Eurex, April 2017

Published byEurex Frankfurt AGMergenthalerallee 6165760 EschbornGermany

Eurex Zürich AGManessestrasse 85 8045 Zurich Switzerland

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8,000micro-earthquakes every day.

Around the world, there are

The information published in this publication is for general information purposes only. It is not intended to constitute investment advice noris it intended for solicitation purposes. Eurex is not responsible for any errors or omissions contained in this publication. Before trading,persons should consider the risks involved and the legal requirements of the relevant jurisdiction.

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