In our last articleâ€”STOXXÂ® Futures: Opportunity for volatility traders with European volatility futuresâ€”we introduced the background and several ideas to trade VSTOXXÂ® Futures contracts available at Eurex Exchange. One of the strategies discussed included the VSTOXXÂ®/ VIX spread strategy.
As an investor, market liquidity is always an important factor in determining asset allocation within a portfolio. Since 2009 the volume of VSTOXXÂ®Futures continues to increase as noted in Table 1.
For a trader or investor already trading VIX futures contracts, adding VSTOXXÂ® Futures to a portfolio should be a relatively easy expansion as both products are gauges of fear and negative volatility for their respective underlying equity markets. If you are new to volatility products or to VSTOXXÂ® Futures, the VSTOXXÂ®/VIX spread maybe a simple entry into the world of volatility products.
As noted in Chart 1, the VSTOXXÂ® historically tends to trade at a premium to the VIX. The data develops a baseline of the spread’s pricing expectations between the two volatility products and when the spread becomes abnormal due to a widening or narrowing spread. Chart 1notes that the two volatility products tend to generally move together over the longer-term. Economies have become more interdependent than ever before, thus it is understandable that when there is increased negative volatility in the European equity markets, similar situations may occur in the U.S. equity markets or vice versa. From 1999 to 2013 the daily static correlation of the two products is READ MORE
Copyright Â©2013 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. www.shorecapmgmt.com
Mark Shore is also an Adjunct Professor and Board Member of Arditti Center of Risk Management at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance. Mark is a contributing writer to Reuters HedgeWorld, Eurex Exchange, CBOE Futures Exchange (CFE) and Micro-Cap Review.
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures and options can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The 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.