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EQDerivatives: ​VIX/V2X Trades Remain Attractive, Despite Recent Decrease

Release date: 21 Jul 2017 | Eurex Group

EQDerivatives: ​VIX/V2X Trades Remain Attractive, Despite Recent Decrease

Article by Georgia Reynolds, EMEA Reporter

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

Despite the poor performance of the CBOE Volatility Index and Euro STOXX 50 Volatility Index spread strategy over the last year, its cost remains attractive and its performance could pick up soon, according to market participants.

The short VIX, long V2X trade remains uncertain, according to Christian Kober, strategist at Barclays in London. However, he expects a pickup in the relative roll cost of VIX and V2X futures to put an end to the underperformance witnessed over the past year.

This underperformance could be due to the short VIX futures trade becoming overcrowded, said Anand Omprakash, director, equity derivatives strategy, at BNP Paribas in New York. “This crowding reduces the roll-down premium you collect, relative to being long V2X.” Additionally, the increased cost of carrying European volatility ahead of the French elections was a major contributor to the underperformance, he said.

Market participants say this spread remains attractive for multiple reasons. “If you look at where the September spread is trading, it’s relatively low vs. where the spot spread has been… which is also on the low end of its historical pricing,” Omprakash said. He added the spread tends to be structurally lower, largely because of different structural flows between SPX (insurance demand and general macro hedge buying), and volatility selling flows on SX5E, as a result of structured product issuance. Specifically, investors could buy the September V2X futures and sell the September VIX futures contract, as a spread. “That would be taking advantage of the relative inexpensiveness of SX5E volatility vs. SPX volatility,” Omprakash added.

“Attractive features of the VIX/V2X spread strategy is its low correlation with the classic equity volatility alpha generators,” Kober said in a recent client note. Barclays maintains allocations as the strategy is able to offer attractive uncorrelated returns in previous market regimes.

Georgia Reynolds is a reporter at EMEA at EQDerivatives, based in London.
A recent graduate from City University London, Georgia has been studying and producing print and multimedia journalism for five years.

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