18 Jan 2023


NextGen Business Initiative, Part 1: Volatility strategies

With the launch of NextGen ETD in June 2022, we changed the way exchange-traded derivative (ETD) contracts or products are identified. In March 2023, we are now following up with three initiatives that have been on our customers' wish list for some time: the integration of weekly options, volatility trading for single stock options and MSCI basis trading. With this date in mind, we asked Philipp Schultze, Head of Equity and Index Sales EMEA at Eurex, and Patric Rippstein, Head of Equity Volatility Trading at Bank Julius Baer to give us insights on volatility trading for single stock options.

Philipp, how does the new Volatility Strategies business initiative work?

Much of the current off-book flow in index derivatives trades in a delta-neutral manner. For example, in an option trade, the respective delta is exchanged in the form of an index future in what is known as an option volatility trade (OVS). These trades aim to eliminate the underlying delta risk and achieve a more aggressive option price. The same type of trade is also used in single-stock options. As part of the NextGen ETD project, Eurex will now also offer physically settled single-stock futures with daily expiration dates from March 2023. These instruments can be linked to an OVS strategy with the respective option transaction and allow participants to trade delta-neutral within the Eurex trading and risk framework. The underlying shares no longer need to be exchanged in a manual back-to-back process, as the physical settlement of the underlying shares takes place entirely within the usual CCP processes. 

And what are the main drivers behind the design of this new business initiative? 

The current trading behavior of delta-neutral strategies in single stock options has some limitations, such as trading channels, manual booking processes, and restrictions on CCP risk and trade usage. The trading flow is currently traded exclusively off the trading book and between counterparties with existing bilateral risk agreements. Various maintenance duties are required within this structure, such as risk, compliance, and know-your-customer (KYC) monitoring. The new solution delegates all these tasks to the CCP and Eurex framework with end-to-end processing. In addition, there are new trading channels such as On-Screen for smaller trades or Eurex EnLight, the exchange-integrated Request for Quotes (RfQ) mechanism.

Patric, what are the benefits of volatility strategies for you as a market participant? 

The ability to trade volatility strategies in their entirety in a single location is a major advantage. It gives a bank the security of being able to trade with any Eurex participant at any time without having to worry about settlement issues. Another advantage is that it eliminates counterparty risk during settlement. In addition, it reduces the workload as it combines the separate settlement processes of options and underlyings in the same step. 

How do you expect volatility strategies to progress in 2023? 

Using these new volatility strategies is simple, much more efficient, and requires no further technological adjustments from our side. The entire settlement can be handled via the existing processes. We have been eagerly awaiting such a solution and therefore, I expect that this new functionality will be used by many Eurex participants quickly. In my opinion, option volatility strategies have a lot of potential and could become the most popular off-book traded strategies.

For more information, watch our short explanatory video here.