In our last article Spreading European and U.S. volatility index futures, we discussed various points of how investors and traders could utilize spread positions between VSTOXX┬« Futures contracts traded at Eurex Exchange and VIX futures as a volatility index spread strategy. We thought it was logical to next examine the forward curves or term structures of these two volatility derivatives for similarities and differences with the goal of revealing potential trading opportunities between the two.
Table 1: Source: http://www.eurexchange.com/blob/exchange-en/62304-62410/656536/1/data/monthlystat_201309.pdf
This article will examine several issues to present a more complete picture for readers. First, we will look at how each term structure moves under different market conditions. Second, we will present possible trading opportunities related to the differences between the term structures. Third, we will suggest reasons for the contango markets observed in both products. And finally, we will raise additional questions that will be answered in subsequent research.
For investors and traders liquidity is always an important component for trading a market. The liquidity of VSTOXX┬« Futures continues to increase as noted in Table 1.
To examine the term structures of VSTOXX┬« Futures and VIX futures, we looked at the average term structure of the two products under the following conditions to determine if the term structure of each changes in different market….
Copyright ┬ę2013 Mark Shore. Contact the author for permission for republication at email@example.com Mark Shore has more than 25 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. His research is found at www.shorecapmgmt.com
Mr. Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business where he teaches a graduate level managed futures/ global macro course. He is a board member of the Arditti Center for Risk Management at DePaul University. Mr. Shore is a frequent speaker at alternative investment events. He is a contributing writer for Eurex Exchange, Reuters HedgeWorld, the CBOE Futures Exchange (CFE) and Micro-Cap Review.
Prior to founding Shore Capital, Mr. Shore was Head of Risk for Octane Research Inc ($1.1 billion AUM) in NYC, where he was responsible for quantitative risk management analysis and due diligence of Fund of Funds. He chaired the Risk Management Committee and was a voting member of the Investment Committee.
Prior to joining Octane, he was the Chief Operating Officer of VK Capital Inc, a wholly owned Commodity Trading Advisor unit ($250 million AUM) of Morgan Stanley. Mr. Shore provided research and risk management expertise on portfolio construction, product development and business strategy. Mr. Shore graduated from DePaul University with a degree in Finance. He received his MBA from the University of Chicago.
Past performance is not necessarily indicative of future results. ┬áThere is risk of loss when investing in futures and options. ┬áFutures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. ┬áThe opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.