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VSTOXX® finds greater international participation

09 May 2015

VSTOXX® finds greater international participation

This article first appeared on 23 April 2015 in EQDerivatives' subscription Commentary & News service

By Robert McGlinchey, EQDerivatives

Hedge funds, across both volatility and multi strategies, are increasingly looking at the VSTOXX® as a way of implementing tactical positioning. Traders expect institutional investors and further asset managers globally to increasingly flock to the underlying as concerns surrounding liquidity slowly dissipate.

The VSTOXX® has been smashing records over the last 12 months. According to Eurex, volatility derivatives near doubled year-on-year in January reaching 1.2 million contracts, while in 2014, 10.3 million contracts were traded in volatility derivatives compared to 7.3 million in 2013. Volumes have remained buoyant in February and March, with the latter month seeing around one million contracts.

“We have been seeing more volumes in VSTOXX®, mainly in selling off premiumvia straddles, calls and put ratios. Recently, when the Vstoxx futures were trading at 21, 22 we saw a surge in 20-18, 20-19 put ratios. Right now, given the current levels, flows have been more mixed but healthy.On the other hand, buyers of vol of vol are usually cross assets players looking for hedges,” said Gabriel Manceau, VSTOXX® trader at Morgan Stanley in London.

The volumes are not solely being driven by Europe and Asia-based participants. In March, Eurex saw 5% of its VSTOXX® Futures flow occur in its extended U.S. trading hours after the 10.30am CST to 3.00pm CST slot was added at the beginning of the month. The exchange is also reviewing its VSTOXX® Options specifications with an eye to considering whether they could be made available to trade in the U.S.

U.S. fund managers, alongside new entrants in Europe and Asia, have been responding to growing interest in the VSTOXX® and developments by Eurex in the underlying by becoming more active in the VIX, VSTOXX® spread, for example, either through options or futures. Those U.S. fund managers are finding greater liquidity in the VSTOXX®, particularly as they now have the ability to trade futures electronically in the underlying.

Market participants that are considering tactical positioning in the VIX, VSTOXX® spread have seen the positive performance of the trade from those funds that structurally have had a long VSTOXX®, short VIX bias. One fund that has taken notice of the opportunity in participating in the spread between the VSTOXX® and VIX has been Amundi. The increased liquidity in the VSTOXX® has made tactical positioning in the underlying increasingly attractive to the fund, with the widening in the spread with the VIX prior to the European Central Bank announcement of QE one example where the increase in liquidity highlighted the attractiveness of the trade. This has typically been reflected by investors where the VSTOXX® and VIX spread sits around 1 or 2 points and implementing a long VSTOXX®/short VIX position.

“Recently, there was a huge increase in the gap and participants were playing the convergence,” said Eric Hermitte, co-head of volatility and convertible bonds at Amundi in Paris, in an interview with EQDerivatives in February. “It’s also possible to play the retracement of vol of vol as most of the vol funds are short VIX vol, and this strategy can be possible when VSTOXX® spikes and you want to play a normalisation of VSTOXX® vol. At Amundi, we are based more on structural long-term views and implement vol positions to position for a change in vol regimes. However, to play tactical changes, the VSTOXX® now has enough liquidity for this type of trading.”

Nico Traissac, head of equity derivatives trading for EMEA at Deutsche Bank in London, said that there has been a spike in flow from some of their clients participating in the VIX, VSTOXX® spread, expecting further new entrants as liquidity continues to increase.
“We have been spending a lot of time on this spread with a significant number of multi-strategy players. Many of them are still concerned by the liquidity on the VSTOXX®, but some are dying to be in this trade. The winners are those that are already diving in because there is this difference between the two that brings with it profitable opportunities,” noted Traissac.

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