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EQDerviatives: VSTOXX Distortion Drives Opportunities

Release date: 01 Mar 2019 | Eurex Group

EQDerviatives: VSTOXX Distortion Drives Opportunities

Article by Georgia Reynolds, EMEA Reporter

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

Significant flow executed in the VSTOXX recently has distorted the index options market, slightly modifying the term structure. This flow is creating opportunities for investors to buy VSTOXX futures calendar spreads for April-May and benefit from a run up in uncertainty ahead of the European elections that fall between the two expiries, according to one investor. 

A market participant in the VSTOXX options market recently executed a large trade to buy protection ahead of European elections. “The trade, one of the biggest sizes ever traded, consisted in EUR 20-25 million vega of VSTOXX may 24-27 call spreads financed by a VSTOXX put spread, effectively generating a maximum pay out of roughly 60 to 75 million in case of market dislocation,” said Alexandre Capez, partner at Mariana in London. Due to the positive delta of the strategy, the bank sales desks had to hedge their portfolios by buying VSTOXX may futures, he said. 
Looking at VSTOXX term structure, the May future is quite inflated now, Capez said. “This said, the cosmetically high 1.6 vol spread between April and May VSTOXX futures is not that high when converted in business day (0.5 vol points only),” he added. 

“Assuming most banks are counterpart to the large trade I think buying VSTOXX futures calendar spread still offers good value. As a short -vega trade it should carry well in coming months and could benefit from a build-up of uncertainty in European elections that fall between the two expiries,” he said, adding that he would not be surprised to see some dislocation happening between VSTOXX® May Future and the EURO STOXX 50® May/June forward vol, which this position would benefit from. 

Cathal Hardiman, institutional trader at IMC in Amsterdam, has been tracking this flow closely. “Almost all of the trading in VSTOXX futures occurs in the front two months, so May was not trading much prior to last week (average 3k lots a day during Feb),” he said. The options structure was traded in three clips on Friday, Monday and Tuesday, Hardiman said. On these days IMC saw volume in the May futures increase significantly to 16k average each day, with a quarter of the volume traded in blocks with the rest traded on screen.

Buying pressure in the futures has slowed since Tuesday, according to Hardiman, but if another clip of the options structure trades he expects to see the same buying pressure return in the May future, both through blocks and on screen.

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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