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This article first appeared on 23 June 2015 in EQDerivatives' subscription Commentary & News service.
VSTOXX® Options have seen an uptick in average daily volume in June, with liquidity now reaching a point allowing dealers to execute trades in larger size. The liquidity is coinciding with a greater need for European-specific hedges, according to market participants.
"The key thing is that [VSTOXX®] Options are now liquid enough for dealers to put clients up on decent size hedging trades –say 5,000 to 10,000 contracts," said a volatility fund manager in New York. “That would have been really hard/expensive two years ago. He told EQDerivatives investors were moving to protect long equity positions put on following the European Central Bank’s quantitative easing measures and in light of the worsening situation with Greece.
VSTOXX® Options have been trading around 50,000 contracts a day in June, compared to the ADV this year up to May of 21,000. The ADV for 2014 was 13,500. EQD reported in April hedge funds, across both volatility and multi strategies, have been increasingly looking at the VSTOXX® as a way of implementing tactical positioning. Eurex noted earlier in the year volatility derivatives near doubled year-on-year in January reaching 1.2 million contracts.
A separate volatility portfolio manager also in New York noted Chicago Board Options Exchange Volatility Index volumes had also been high recently. "I would think it’s more related to Greece and overall increase in hedging than "choosing" [VSTOXX®] over VIX," he said. In contrast, the ADV for VIX options for June through Monday’s close was 628,234, according to the Options Clearing Corp.
The volatility fund manager said the extra liquidity likely accounted in part for why VSTOXX® has gone so high relative to the VIX, compared with past periods of Europe-driven concerns. “Often VIX spiked as much or more than [VSTOXX®] historically in part because that’s where the liquidity was,” he added. “We’ve had several dealers in the office recently who were quite excited to talk about this."
The VSTOXX® was trading at 22.36 during U.S. afternoon trading, having spiked this week to 29.43 from 23.36 at the start of June. The VIX was trading at 12.74, down from 13.96.
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