VSTOXX® | Discovering Volatility | Eurex Exchange

www.eurexchange.com
Spotlight on:
VSTOXX®
–
Discovering volatility
Research papers on European volatility & articles
on real life applications

2
Table of contents
03 Foreword
Research Papers –
Discovering volatility/
focus on VSTOXX®
Colin Bennett on volatility trading
05 Part 1: The evolution of volatility products
09 Part 2: Volatility Futures as an alternative
to equity and puts
Mark Shore on VSTOXX Derivatives
15 Part 1: Utilizing a European volatility index
for Pan-European volatility
21 Part 2: VSTOXX®
/VIX volatility spread behavior
during recent volatility events
28 Part 3: Introduction of CFTC-certified options
on VSTOXX®
Futures
Articles –
Real life applications
Robert McGlinchey:
34 Directional VSTOXX®
Options flow spikes
on Friday as event risk grows nearer
35 VSTOXX®
Futures spreads garner interest
as key events near
Georgia Reynolds:
37 EMEA: selling Nov. VSTOXX®
put to buy
Dec. call spread pricing attractively
38 Italian referendum date clarity adds to favorable
long VSTOXX®
short VIX RV play
38 VSTOXX®
term structures at three year highs,
despite macro risks
39 Barclays signals show VIX/VSTOXX®
futures
spread strategy to continue outperforming
41 Contacts

3
Foreword
2017 is shaping up to be yet another record year
for our volatility products. Open interest on
VSTOXX®
Futures and VSTOXX®
Options have
reached record high with 420,000 and 1,200,000
contracts respectively.
The VSTOXX®
Futures and VSTOXX®
Options
continue to strengthen their position as the European
benchmark for volatility, with an increasing number
of market participants using Eurex’s volatility
offering to gain or hedge their exposure in Europe.
This booklet is a compilation of selected research
papers on European volatility as well as a series
of articles highlighting real life applications for these
products. Written by experts from across the globe,
this booklet aims to share further insights on
the evolution of volatility, highlight volatility trading
strategies and feature successful real life applications
during those volatile times.
VSTOXX®
, the European volatility benchmark
VSTOXX®
Derivatives are designed to reflect
the investor sentiment and overall economic
uncertainty by measuring the 30-day implied
volatility of the EURO STOXX 50®
.
Futures and options on VSTOXX®
offer the most
accurate and cost-effective way to take a view
on European volatility. Unlike trading volatility with
hedged index options, there are no transaction
costs in managing deltas for VSTOXX®
Derivatives.
VSTOXX®
Derivatives are exchange-traded and
centrally cleared, providing independent mark-to-
market valuation and robust liquidity.
About Eurex Exchange
Eurex Exchange, one of the world’s leading derivatives
exchanges, offers about 2,000 products across
nine traditional and alternative asset classes to provide
market participants with a broad product diversity
for greater opportunities.
Our futures and options on EUR-denominated govern-
ment bonds and derivatives on the benchmark indexes
DAX®
and EURO STOXX 50®
are among the most
actively traded interest rate and equity index derivatives
in the world.
Eurex Exchange offers the broadest complex of listed
MSCI Index Futures and Options, available via the order
book as well as via Eurex Trade Entry Services.
Our volatility futures and options on the VSTOXX®
highlighted in this booklet offer a convenient and
cost-effective way to take a view on European volatility.

4
Research Papers –
Discovering volatility/
focus on VSTOXX®
These research papers go in more depth into volatility products
and history, but also drill down on some of the usage and benefits
of the VSTOXX®
.

5
Original VIX suffered from launch of variance swaps
at the same time
While the original S&P100 VIX was a significant innovation
in 1993, the product became almost immediately out-dated
as variance swaps were also launched at a similar time.
Variance is the square of volatility, which makes variance
a difficult concept to understand. However as the pay-out
of a delta hedged option is variance, not volatility, variance
is mathematically the correct measure of deviation. This can
be seen in the diagram below, which shows that a delta
hedged option makes 4x the profit when you double
the stock price movement. If the payoff of an option
was based on volatility, not variance, then a delta hedged
option would make 2x the profit when you double
the stock price movement.
Original VIX was based on ATM volatility
The first volatility index was the original S&P100 VIX,
which was created by Professor Robert Whaley on behalf
of CBOE in 1993 (and back calculated from 1986).
Before this date a volatility index was simply an academic
concept that had been discussed since 1987. The original
VIX was based on S&P100 ATM volatility of: calls and
puts; strikes above and below spot; expiry before and
after the 22 trading day (c30 calendar days or c1 month)
maturity of the index. The calculation methodology
therefore uses as an input 8 different ATM implied
volatilities, which is reduced to a single VIX value using
the below process:
• Average the call and the put implied volatility for
options of same strike and expiry. This reduces
the 8 original data points to 4.
• Linearly interpolate between the two strikes of
options of same expiry to get spot ATM volatility.
The 4 data points are therefore reduced to 2.
• Linearly interpolate (or extrapolate if the nearest
maturity is within 8 calendar days, as near dated
implies, suffer from data quality issues) to get
a 22 trading day implied volatility.
Colin Bennett on volatility trading
Part 1: The evolution of volatility products
Published: 30 May 2016 | Eurex Exchange
The first in a 2 part series of articles on volatility, this introductory report describes the evolution
of the volatility product landscape over time, and the different methods of calculating volatility
indexes. Example trades for both volatility futures and options on volatility futures are shown.
About Colin Bennett
Colin Bennett is the author of “Trading Volatility”, the top
ranked book on Amazon for volatility. Previously he was
a Managing Director and Head of Quantitative and
Derivative Strategy at Banco Santander, Head of Delta 1
Research at Barclays Capital, and Head of Convertible
and Derivative Research at Dresdner Kleinwort.

6
Volatility Indexes are now usually based on variance
As variance swaps became increasingly popular post-1998
due to the LTCM crisis, it became clear that a volatility
index should be based on a variance swap calculation
(which uses the implied volatility of all strikes) not an ATM
volatility calculation (which only uses the implied volatility
of 8 options). A new VIX was therefore launched in 2003
with a variance based calculation, and the underlying
changed from the S&P100 to the S&P500. The original
S&P100 VIX was renamed VXO. While the majority of
volatility indexes use a variance based calculation, there are
a few volatility indexes on less liquid indexes (which only
have reliable data for ATM options) that continue to use
an ATM volatility calculation.
Different index providers use different variants
of variance calculation
The major drawback of a variance based calculation is the fact
this requires perfectly liquid options for every strike (zero to
infinity). To insure the volatility index has a sufficiently high
data quality, less liquid OTM options need to be excluded
from the calculation. While the calculation of a variance swap
is purely mathematical, and therefore impossible to copy-
write, each index provider has their own bespoke method
of removing illiquid options which is subject to copy-write.
For this reason the calculation method of volatility indexes
of different providers is slightly different.
Old VIX, new VIX, VDAX®
, New VDAX®
and VSTOXX®
launch date and first data point
1986 1990 1992 1994 1999 2003 2005
M
VDAX®
Rec.
M
V1X (VDAX®
NEW)Reconstructed V1X
M
V2X (VSTOXX®
)Reconstructed V2X
M
V3X (VSMI®
)Reconstructed V3X
M
VIXReconstructed VIX
M
VXO (original VIX until 2003, now known as VXO)Reconstructed VXO

7
As volatility means reverts over a period of a few months,
the sensitivity of VSTOXX®
Futures to the VSTOXX®
decreases as maturity increases. For this reason, it is not
usually wise to trade VSTOXX®
Futures of maturity
6 months or more.
Volatility futures can offer cheaper protection
than puts when volatility is low
When equity markets plummet, this normally happens with
high volatility. Conversely, when equity markets rise
they tend to do so gradually with low volatility. This means
volatility is negatively correlated to the equity market.
A long volatility future position can therefore be used to
hedge a long equity position. A portfolio of long volatility
futures and long equity should therefore have a low
volatility, and hence lower risk of significant negative returns.
As volatility is on average expensive, this reduction in
risk comes at the expense of a lower average return.
However using volatility futures can be a cheaper hedge
than buying put options. This is because a put option
expires worthless if equities do not decline, while implied
volatility is floored and never declines to zero.
Selling volatility earns small profits on average,
so needs to be done regularly and with short
maturity (1 month)
Investors can therefore profit from selling volatility futures.
The disadvantage of this strategy is that while on average
small returns are earned, occasionally a large loss is suffered.
This strategy could be seen to be similar to selling insurance.
Volatiliy indexes are not tradable
The calculation of a volatility index is based on the implied
volatility for a fixed number of days, normally 30 calendar
days. As listed options are only available for monthly or
weekly expiries, for the majority of days a volatility index
has to use as an input the implied volatility for two expiries
(normally the expiry just before and just after the theoretical
expiry of the index). A volatility index is therefore only
useful as an indicator of how volatile the market expects
the underlying to be. If an investor wants to trade volatility,
they have to use an instrument with a fixed expiry such
as a volatility future (or an ETN/ETF whose payout is based
on volatility futures, like the VSXX1).
Can trade volatility through futures
As a future has a fixed expiration, it can be hedged with
a portfolio of options which also have a fixed expiration.
This means that market makers are able to offer liquidity on
futures on volatility indexes, as they can hedge their risk
with ordinary option on the underlying equity (or equity
index). The expiration of volatility futures is chosen so at
maturity they are 30 days from the ordinary options expi-
ration, as 30 days is the market standard expiration for
volatility indexes. Having this non-standard expiration means
that market makers only need to hedge most of their
volatility risk with one expiry2. This reduces hedging costs
which allows them to narrow their bid offer spreads.
Volatility futures as a hedge should have maturity
between 2 and 5 months
As put options are typically used to buy protection, investors
typically buy (rather than sell) them. This usually lifts the
value of implied volatility above fair value. As a future on
a volatility index is based on the implied volatility of options,
they are on average expensive. This can be seen from
the diagram below, which shows the average daily return
for VSTOXX®
Futures in the 3 months approaching expiry.
As the average daily loss for VSTOXX®
Futures between
2 and 5 months or more to expiry is relatively small,
this is the optimum maturity for long VSTOXX®
strategies.
1 The VSXX is the VSTOXX®
equivalent of the VIX based VXX.
2 As a volatility future is similar to a forward start on volatility (or variance),
the position will need to be hedged with two expiries (the main risk
from the farthest maturity at the end of the forward start, but also
a smaller amount of risk from a nearer dated expiry at the beginning of
the forward start).

8
Most of the time a small premium is earned, but in the event
of an accident a large loss has to be covered. Given the
asymmetric risk reward profile of selling volatility futures, it is
only seen to be worthwhile if done regularly (in the same
way an insurance company sells lots of insurance, and does
not do it as a one off). As VSTOXX®
Futures suffer on
average the largest loss in the final month to expiry (see
diagram on page 3), this is the optimum maturity for
a short volatility strategy.
Volatility futures can offer higher returns than
equity futures
While it is rare for equities to double or halve over periods
less than 1 year, it is possible for volatility to double in a few
days or halve in periods as short as a month. Investors who
have high conviction regarding the direction of markets
can consider volatility futures to be a more profitable way
of expressing that view. We would caution that with
the higher potential reward, there is higher potential risk.
Options on volatility futures also offer
volatility exposure
Investors who wish to be long volatility are normally
expecting a volatility spike. While volatility futures will be
profitable in the event of a volatility spike, call options
on volatility could be significantly more profitable as they
offer geared exposure to any volatility upside. The chart
above shows the 3 months return for VSTOXX®
20 strike
(i.e. roughly ATM) call options against the 3 month
return for the identical maturity VSTOXX®
Future. As can
be seen, the profits on a long VSTOXX®
call option can
be up to 10 times larger than profits on VSTOXX®
Futures.
This additional exposure to volatility spikes comes at
the cost of a far larger average loss (24%) than the average
loss on VSTOXX®
Futures (6%) over the 3 month period.
Buying puts on volatility futures profits from
expensive implied volatility
Options on equity indexes are normally overpriced,
and the greater the maturity the more expensive they are
on average. Because of this, investors can on average
profit through buying put options on volatility futures,
particularly when volatility is high (as volatility tends to
mean revert, hence if it is high it is likely to decline).

9
Volatility Futures were first listed in Europe
The DTB (now Eurex) was the first exchange to list Volatility
Futures. These VOLAX®
Futures were based on ATM
3 month implied on the DAX®
, and they were listed in 1998
(and subsequently delisted later the same year). Six years
later in 2004 Volatility Futures were listed on the VIX, which
was swiftly followed a year later by the launch of VSTOXX®
(and VDAX®
and VSMI®
) futures in 2005.
Volatility has negative correlation to equity
As volatility tends to rise when equities decline, a long
Volatility Futures position can be taken as a hedge.
For short periods of time (e.g. over 1 day or 1 week) there
appears to be a linear negative relationship between
volatility and equity returns, as can be seen in the chart
below (we note this hedge has a certain amount of noise).
Volatility can have convex profile versus equities,
just like a put
Returns over relatively short periods of time hide the fact
that volatility is floored at a certain level, for example
the VSTOXX®
never trades below c12%. This means that
the loss from a long VSTOXX®
Future is floored, hence
returns over a longer time period (e.g. 3 months) show
a more convex profile than daily returns. A long Volatility
Future can therefore be compared against puts, particularly
when volatility is low and the impact of the volatility floor
is greatest.
Long ATM SX5E put has similar payout to 5 VSTOXX®
Volatility Futures
As a Volatility Future is a future on a 1 month Volatility
Index, the implied volatility of a 3 month Volatility Future
trades in line with that of a 4 month put. The return of
Volatility Future of 3 month expiry until maturity should
therefore be compared to the 3 month return of a 4 month
put (i.e. the return of a put with 4 month maturity up until
it has only 1 month left to expiry). Similarly, the return of
a Volatility Future with 1 month until expiry should be com-
pared to the 1 month return of a 2 month put (i.e. return
of a put with 2 month maturity until it has only 1 month left
to expiry). For both 3 month Volatility Futures (vs 4 month
ATM put) and 1 month Volatility Futures (vs 2 month ATM
put) the payout of an ATM put is very similar to the payout
of 5 VSTOXX®
Volatility Futures. Hence 5 VSTOXX®
Volatility
Futures could be considered an alternative to one SX5E ATM
put. It should be remembered that the payout of a Volatility
Future is less reliable than that of a put.
Part 2: Volatility Futures as an alternative
to equity and puts
In our final part of our 2 part series on volatility, Volatility Futures are examined in depth
both as an alternative to equity and as an alternative to puts. The key characteristics of trading
volatility in practice are demonstrated, and the differences between Volatility Futures and
Variance Swaps analyzed.
Daily returns of V2X versus SX5E
V2X Futures versus SX5E put

10
Volatility Futures implied should be compared with
underlying index implied one month later
As Volatility Futures are a based on 1 month forward
volatility, they should be compared with the volatility of
the underlying index 1 month later than the Volatility
Futures expiration. The term structure of Volatility Futures
therefore has a 1 month offset to the term structure of
the underlying index.
For example, the Volatility Futures for VSTOXX®
December
expiry should be compared with the SX5E January expiry
the following year. This is because the December expiration
of the VSTOXX®
is based on what the VSTOXX®
is on
the (3rd or 4th Wednesday) Volatility Futures expiration in
December. On the December Volatility Futures expiration,
the VSTOXX®
30 day volatility is based on the index
(3rd Friday) January expiry (of the following year) of the
SX5E options. Due to the large number of public holidays
between December and January expirations (Christmas
and new year) the SX5E volatility term structure normally
has a dip in January. Therefore VSTOXX®
volatility
term structure normally has a dip in December (due to
the 1 month offset).
Volatility mean reversion dampens returns
of far dated futures
When an unexpected event occurs, volatility normally
jumps. As markets digest the news, volatility tends to
soften and mean revert over a period of up to 10 months.
This mean reversion can be seen by plotting the minimum
and maximum implied volatility per maturity (a volatility
cone) as can be seen in the chart below. As near dated
implieds have a wider min-max range than far dated implieds,
this means that when a volatility index spikes near dated
Volatility Futures rise more than far dated volatility futures.
Far dated Volatility Futures could be seen as a more stable
(or less levered) way of gaining volatility exposure.
Volatility futures could outperform puts
While the performance of a SX5E ATM put and 5 VSTOXX®
Volatility Futures appears similar, the payout of 5 VSTOXX®
Volatility Futures has historically been higher than for SX5E
ATM puts. This means using VSTOXX®
Volatility Futures for
protection could outperform using SX5E ATM puts.
Volatility Futures trading in practice
Trading Volatility Futures allow a volatility position to be
taken without the overhead of delta hedging an option.
Before trading Volatility Futures it is important to take into
account the key differences between volatility trading via
options, and Volatility Futures.
Volatility Futures are a forward on volatility
Upon expiration of a Volatility Futures, the pay-out is based
on the underlying Volatility Index. Hence when trading
a Volatility Futures, the profit and loss is based on a future
on volatility (which is the same as a forward on volatility,
as a future is simply a listed forward). While trading a forward
on volatility has many similarities with trading volatility
itself, there are also important differences.
Volatility Futures expiration is 30 days prior to
normal expiry
To make it easier for traders to hedge their Volatility Futures
position, a Volatility Futures expires 30 days (the maturity
of the underlying volatility index) prior to a normal option
expiration. As expiration is normally on the 3rd Friday of
a month, a Volatility Futures expiration will be on the 3rd or
4th Wednesday of a month (as normal option expirations
can be 4–5 weeks apart, i.e. 28–35 days).
Non-standard expiry (3rd or 4th Wednesday) makes
Volatility Futures easier to hedge
While having a non-standard expiry could be seen to be
confusing, it does mean that on the date of expiration,
the underlying Volatility Index is calculated using the implied
volatility for only one maturity (no interpolation or extra-
polation between two expiries is needed). A Volatility Futures
that expires in November, will therefore be hedged by
trading a strip of options for the December expiry one
month later.

11
Near dated Volatility Futures have highest sesitivity
to index, but need to be rolled more frequently
While near dated Volatility Futures are more sensitive to
the underlying Volatility Index, the position needs to be rolled
frequently. Before deciding on the maturity of a Volatility
Futures, an investor needs to decide how much overhead
(i.e. rolling frequency) they are willing to take, and how
sensitive to moves in volatility they want the position to be.
For example, while the front month Volatility Futures has
a very high delta (90%) with the Volatility Index this would
require rolling every month.
Volatility mean reversion reduces delta of
far dated futures
Volatility tends to jump, and then mean revert over a period
of time just under 1 year. Near dated Volatility Futures will
therefore have a delta (or exposure/sensitivity) to the under-
lying Volatility Index of nearly 100% (e.g. c90% for 1 month
volatility futures). The delta (or exposure/sensitivity) of
Volatility Futures will fall as maturity increases, as mean
reversion makes it unlikely that the current levels of volatility
will remain over the entire life of the Volatility Futures.
Delta of VSTOXX®
Futures versus VSTOXX®

12
A plot of the sensitivity (i.e. delta) of Volatility Futures to
the underlying Volatility Index is shown above both for
rolling every month, and for rolling at expiry. For example,
the 3 month data point can either always have a 3 month
maturity (i.e. it is rolled when the maturity reduces to
2 months) or can have a maturity between 0 and 3 months
(i.e. it is rolled at expiry). The delta when rolling at expiration
can be considered a blend of the deltas when 1 month
rolling. For example, the delta of a 3 month future rolled at
expiry is a blend of the deltas of the 3, 2 and 1 month
future rolled after 1 month.
Grafik 10
Using 1 month or 3 month futures is best
(when rolled at expiry)
The diagram above shows the delta of a Volatility Futures
rolled at expiry vs the number of times in a year you have
to roll the position. Investors seeking the highest delta should
always use 1 month futures and roll 12 times per year.
Investors seeking a balance between the delta, and the over-
head of rolling the position should use 3 month futures and
roll at expiry (i.e. roll 4 times a year). While using 2 month
futures has a higher delta than 3 month futures, it is not very
significantly for the additional overhead of rolling 6 times
a year rather than 4. Using 4 month futures only saves 1 roll
per year (as you roll 3 times not 4) and has a significantly
reduced delta compared to 3 month futures.
While near dated Volatility Futures are most sensitive
to index, they also suffer from being most expensive
In addition to considering the sensitivity of a Volatility
Futures to the underlying index, and the number of times
the position has to be rolled, and investor should also
consider how expensive the position is to hold. As term
structure is on average upward sloping, this means a Volatility
Futures should on average decline as maturity approaches.
As the slope of term structure is relatively flat at the far end,
longer dated Volatility Futures suffer less from time decay than
near dated Volatility Futures. This can be seen in the diagram
below. To reduce the impact of time decay an investor can
use far dated futures, potentially rolling when the position
is 2 months or less. This strategy would have a lower delta
than using near dated futures. There is in effect a trade-off
between the cost of holding the position, and the effective-
ness of the position. Should an investor be using Volatility
Futures tactically (i.e. not all the time, but only in advance
of key events likely to cause high volatility) near dated
Volatility Futures are likely to be preferred. If an investor
is using volatility strategically (i.e. continuously as part of
a diversified portfolio) far dated Volatility Futures (potentially
rolled before expiry) is likely to be preferred.
Volatility Indexes overestimate future volatility
A variance based estimate includes not only information
about future volatility, but also includes a volatility risk
premium. As a volatility risk premium lifts the value of
a variance based Volatility Index, Volatility Indexes usually
overestimate future volatility. This means that selling
Volatility Futures is a viable way of earning alpha.
Volatility Futures settlement can suffer
from imbalances
A Volatility Futures will be hedged with a strip of options of
all strikes. As OTM options are typically less liquid than
ATM options, Volatility Index providers have rules to exclude
Futures delta versus number of times roll per year

13
Fair price of Volatility Futures is below
forward variance
Volatility Futures tend to trade just below the levels of
forward variance. If a Volatility Futures traded at the same
level as forward variance an arbitrageur could simply go
long forward variance and short Volatility Futures to construct
a portfolio that can only earn profits. This can be seen by
looking at the pay-out of a VSTOXX®
Volatility Futures and
a forward 30 day (to match VSTOXX®
) variance swap
for identical vega. We shall assume the strike of both the
VSTOXX®
and forward variance is 20. As vega gives
the P& L sensitivity to volatility, having identical vega means
the pay-out should be identical for small deviations of vola-
tility about the level 20 (i.e. the gradient of the two lines
are identical for volatility at 20). The diagram below shows
the pay-out of forward variance is always equal to or above
the pay-out of the VSTOXX®
(if they are the same price),
hence a long forward variance short VSTOXX®
portfolio only
has a positive pay-out.
Grafik 12
Volatility Futures discount to forward variance
increases as maturity and volatility of volatility
increases
For reasonable prices (i.e. volatility future price less than
forward variance) the profile of a long Volatility Futures
and short forward variance swap is similar to short straddle
on volatility of volatility. This means the difference between
a volatility and forward variance should increase as the
maturity increases, and as volatility of volatility increases
(just as the premium of a short straddle increases as time
increases and volatility increases). While we have used
Volatility Futures in this example, volatility swaps (which
can be approximated by ATMf volatility) can be substituted
for Volatility Futures.
OTM options if they are too far OTM or are illiquid. While
this improves the reliability of the Volatility Index calculation,
it makes it harder for traders to hedge as they are not
certain if they need to trade an OTM option or not (a sudden
change in spot or liquidity approaching expiry could cause
the option to be included or excluded from the calculation).
In deciding the methodology, there is a trade-off between
how easy it is for liquidity providers (i.e. market makers and
traders) to hedge and data reliability. Typically end clients
are reluctant to trade an instrument that could expire at
a significantly different value to the prints just before and
just after expiration. Just as there have been issues with
the settlement price of equity indexes (e.g. the FTSE June
2005 expiration) there can be issues with the settlement
price of Volatility Futures.
Appendix
For all the examples in the appendix we shall for simplicity
assume that the calculation of the volatility index is
identical to a variance swap. This means the difference
between forward volatility, Volatility Futures and forward
variance is not related to any chopping of OTM tails or
any other practicalities of Volatility Futures.
Volatility Futures fair price is not equal
to forward variance
Despite the fact Volatility Futures use a variance swap based
calculation, the fair price of a Volatility Futures is not equal to
forward variance. In fact the fair price of a volatility future is
below that of forward variance. As maturity (and volatility
of volatility) increases the difference between the price of
a variance swap and Volatility Futures widens. This can be
seen by comparing a Volatility Index such as the VSTOXX®
with a forward variance swap. We note that volatility of
volatility can be seen in an index such as the VV2X, which
is the volatility of options on VSTOXX®
Futures.
VSTOXX®
with same price as forward var

14
To see this effect graphically we shall first examine the pay-
out of a long Volatility Futures and short forward variance
swap. We shall assume the forward variance swap is trading
at 20 (as before) but this time the VSTOXX®
volatility future
trades 1 point lower at 19.
Grafik 13
The pay-out of a long Volatility Futures short forward
variance is then similar to a short straddle on volatility
(as can be seen from the below diagram).
Grafik 14
Volatility Futures is short volatility of volatility
As the volatility (or variance) exposure of a variance swap
can be hedged with a static portfolio of options, a variance
swap has no volatility of volatility risk. As the pay-out of
a Volatility Futures is linear in volatility, this means it is short
volatility of volatility.
This can be seen in the diagram above, if volatility remains
near 20 (i.e. low volatility of volatility) a Volatility Futures
is more profitable than a forward variance swap. If volatility
suddenly changes to be very high or very low (i.e. high
volatility of volatility) then a Volatility Futures is less profitable
than a forward variance swap. As a (forward) variance swap
is neither long nor short volatility of volatility risk, this means
a Volatility Futures is short volatility of volatility risk (as it
profits when vol of vol is low, and suffers when vol of vol
is high).
Options on Volatility Futures can hedge volatility
of volatility position
As Typically Volatility Futures are expensive, which is why
many trading desks put on a short Volatility Futures long
forward variance position. As a short Volatility Futures position
is long volatility of volatility, this means a short Volatility
Futures long forward variance position is also long volatility
of volatility (an uncapped variance swap has zero volatility
of volatility exposure). The value from this position can be
extracted by selling (a strip of) options on Volatility Futures,
as options on Volatility Futures (like most options) are on
average expensive.
Post credit crunch, many banks prefer to trade
Volatility Futures/swaps rather than variance swaps
By some measures the levels of volatility seen post Lehman
bankruptcy were higher than during the great depression.
As there was a long low volatility bull market between 2003
and 2007, risk departments were not prepared for the
extreme pay-outs of convex instruments such as variance
swaps. Now there is a preference for non-convex instru-
ments, such as Volatility Futures or volatility swaps,
as many banks prefer to take (small) vol of vol risk than
(high) convexity risk.
VSTOXX®
with same price as forward var
VSTOXX®
– Forward 30 day variance

15
Market reactions to the Brexit vote are still being determined
and several European elections right around the corner,
this is a timely opportunity to examine various moments of
global macro volatility and how several European equity
indexes behaved during these moments.
Does this discussion begin to identify a larger macro story
of positive correlation behavior of several European equity
indexes? If so, could investors find potential utility in
the VSTOXX®
Futures volatility index?
In past articles, I’ve discussed the negative correlation
between the VSTOXX®
volatility index and the EURO
STOXX 50®
Index and how the volatility index tends
to rally when equities decline (downside volatility).
The recent passing of the Brexit vote on 23 June 2016
introduced immediate uncertainty and downside volatility to
the global capital markets. The results of several upcoming
European elections could introduce more uncertainty and
volatility into the capital markets. According to Bloomberg
News, 40 percent of the EU economy will be voting
in 2017.1
Mark Shore on VSTOXX®
Derivatives
Part 1: Utilizing a European volatility
index for Pan-European volatility
Published: 23 January 2017 | Eurex Exchange, Eurex Group
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
(see full biography on page 32).
Part 1: Utilizing a European volatility index for
Pan-European volatility 15
Part 2: VSTOXX®
/VIX volatility spread behavior
during recent volatility events 21
Part 3: Introduction of CFTC-certified options
on VSTOXX®
Futures 28
1 https://www.bloomberg.com/news/articles/2016-07-31/europe-elections-2016-17-the-votes-to-watch

16
Table 1: VSTOXX®
Futures yearly volume and open interest as of Sept 2016
Total volume
7,090,656
7,226,833
6,962,188
5,324,708
3,901,530
1,889,492
431,669
14,715
YOY change
26.1%
3.8%
30.8%
36.5%
106.5%
337.7%
2,834.0%
12.0%
Daily average volume
36,739
28,341
27,519
21,046
15,300
7,352
1,686
58
Open interest
295,348
108,132
173,986
184,900
224,061
68,088
58,700
1,304
2016
2015
2014
2013
2012
2011
2010
2009
Source: Eurex Exchange monthly statistics
Table 2: Correlation matrix of daily spot returns of VSTOXX®
, EURO STOXX 50®
Index, CAC 40 index, FTSE 100 index,
DAX®
index and STOXX®
Europe 600 index from 2 Jan 2007 to 30 Sept 2016 (in EUR)
VSTOXX®
1.00
EURO STOXX
50®
Index
–0.77
1.00
CAC 40
–0.76
0.98
1.00
FTSE 100
–0.67
0.85
0.87
1.00
DAX®
–0.74
0.95
0.93
0.82
1.00
STOXX®
Europe 600
–0.76
0.96
0.97
0.94
0.93
1.00
VSTOXX®
EURO STOXX 50®
Index
CAC 40
FTSE 100
DAX®
STOXX®
Europe 600
Source: Bloomberg data
Liquidity is always important to an investor or trader. Table 1
gives readers an overview of the VSTOXX®
Futures liquidity
over the last years.
When examining the correlation of several European equity
indexes, Table 2 demonstrates the relatively high positive
correlation among various European spot equity indexes and
a relatively high negative correlation the equity indexes
tend to experience relative to VSTOXX®
spot. An initial obser-
vation indicates the volatility index may offer added value
to multiple European equity indexes if the indexes tend
to be positively correlated.
When analyzing correlations on a dynamic basis of a 20-day
rolling correlation in Chart 1, the positive correlation of
the EURO STOXX 50®
Index remains relatively consistent to
the CAC 40, DAX®
and STOXX®
Europe 600 indexes.
This result begins to build an argument for the VSTOXX®
volatility index to offer an added value for investors
with exposure to multiple European equity indexes. There is
greater variance of correlation of the EURO STOXX 50®
Index to the FTSE 100 index.
When the FTSE 100 index is removed from the chart,
a relatively high consistent positive correlation between
the CAC 40, DAX®
and STOXX®
Europe 600 indexes
to the EURO STOXX 50®
Index on a 20-day rolling basis
becomes more apparent.

17
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
EURO STOXX 50® / CAC EURO STOXX 50® / FTSE 100
EURO STOXX 50® / DAX® EURO STOXX 50® / STOXX® Europe 600
Jan 2007
M
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016
Chart 1: 20-day rolling correlations of EURO STOXX 50®
Index to CAC 40, DAX®
, FTSE 100 & STOXX®
Europe 600 indexes
1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0.60
0.55
Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016
EURO STOXX 50® / CAC
EURO STOXX 50® / DAX®
EURO STOXX 50® / STOXX® Europe 600
Chart 2: 20-day rolling correlations of EURO STOXX 50®
Index to CAC 40, DAX®
, & STOXX®
Europe 600 indexes

18
12,000
10,000
8,000
6,000
4,000
2,000
360
300
240
180
120
60
EURO STOXX 50® CAC 40 FTSE 100 DAX® VSTOXX® STOXX® Europe 600
Jan 2007
M
Price of European equity indexes (in EUR) Price of VSTOXX® (in EUR)
Chinese
Financial
Turmoil Brexit
2008 Financial
Crisis
Greek Debt
Crisis
European Debt
Crisis
Chart 3: Spot prices of EURO STOXX 50®
Index, DAX®
index, CAC 40 index, STOXX®
Europe 600 index FTSE 100 index
and VSTOXX®
from Jan 2007 to Sept 2016
No one has a crystal ball to identify when equity markets
will decline. The so-called rare “Black Swan” events have
occurred several times over the last decade. Beginning in
2008 with the Financial Crisis and followed by the Greek
Debt Crisis, and followed by the European Debt Crisis,
and followed by the Chinese Financial Turmoil and followed
by the Brexit vote. In each of these global macro events
the five European stock indexes declined and VSTOXX®
volatility index rallied.
As noted in Chart 3, the equity indexes tended to peak,
decline and find support around the same time. This suggests
when the global macro events occur, investing in equities
geographically across Europe may not offer enough diversi-
fication to reduce the portfolio correlation risk and tail risk.
The returns in Table 3 are based on when the EURO
STOXX 50®
Index peaked and bottomed surrounding each
event and how the VSTOXX®
volatility index and the four
European equity indexes behaved during each period. During
the five volatile periods the five equity indexes experienced
similar negative returns. In the same periods the VSTOXX®
spot index rallied. This is in-line with the previous corre-
lation data showing negative correlation of the VSTOXX®
index to the European equity benchmarks.

19
Based on 5-day rolling returns, Chart 4 demonstrates
how the front month futures contracts of the four European
indexes traded with similar returns prior to and post
the Brexit vote on 23 June 2016. Once again, this offers
some more evidence to the positive correlations among
the respective European equity indexes discussed earlier.
When the 5-day rolling returns of front month VSTOXX®
Futures is added to the chart, the negative correlation
performance of VSTOXX®
Futures becomes very pronounced
relative to the front month futures contract of the four
European equity indexes. Once again, the results may
offer the option to employ VSTOXX®
Futures with several
European equity indexes besides the underlying EURO
STOXX 50®
Index.
Table 3: Returns of spot European equity indexes and VSTOXX®
spot index during each of the volatile periods when
the EURO STOXX 50®
Index declined from peak to trough
5.0%
2.5%
0.0%
-2.5%
-5.0%
-7.5%
DAX® STOXX® Europe 600 CAC 40 EURO STOXX 50®
8 Apr 16 15 Apr 16 22 Apr 16 29 Apr 16 6 May 16 13 May 16 20 May 16 27 May 16 3 Jun 16 10 Jun 16 17 Jun 16 24 Jun 16
Chart 4: 5-day rolling returns of European equity index front month futures contracts prior and post the Brexit vote
(23 May 2016)
Financial Crisis
167%
–60%
–59%
–61%
–54%
–60%
Greek Debt Crisis
106%
–18%
–18%
–6%
–6%
–10%
European Debt
Crisis
172%
–35%
–31%
–17%
–32%
–25%
Chinese Financial
Turmoil
87%
–21%
–17%
–18%
–24%
–18%
Brexit
72%
–14%
–13%
–12%
–11%
–12%
VSTOXX®
EURO STOXX 50®
Index
CAC 40
FTSE 100 (in EUR)
DAX®
STOXX®
Europe 600

20
45%
30%
15%
0%
-15%
30%
DAX®
STOXX®
Europe 600VSTOXX®
CAC 40EURO STOXX 50®
8 Apr 16 15 Apr 16 22 Apr 16 29 Apr 16 6 May 16 13 May 16 20 May 16 27 May 16 3 Jun 16 10 Jun 16 17 Jun 16 24 Jun 16
Chart 5: 5-day rolling returns of European equity index front month futures and VSTOXX®
Futures front month prior and
post the Brexit vote (23 May 2016)
In summary, when examining the correlations either as a static metric or as a rolling metric,
the correlations of the European equity indexes tend to maintain a high positive correlation
frequently above 0.8 to the EURO STOXX 50®
Index. During the various volatile periods
the equity indexes tended to peak, decline and bottom around the same time. On the flipside,
VSTOXX®
volatility index tends to maintain a relatively high negative correlation to these
respective equity indexes.
When viewing the most recent macro event (Brexit), on a rolling 5-day return, the returns
tended to behave in similar fashion to each other leading up to and post the Brexit vote.
Combining all of these results strongly suggests an investor with exposure to one or many
of these European equity indexes may find an added value in utilizing VSTOXX®
Futures
to reduce portfolio tail risk and correlation risk.

21
In past articles I’ve discussed the various behaviors of
the VSTOXX®
/VIX spread. This article follows my last article
“Utilizing a European volatility index for Pan-European
volatility” examining VSTOXX®
behavior in recent volatility
events relative to various European equity indexes.
The Brexit election and the U.S. election are now behind us.
Several European elections are on the horizon in 2017.
And there doesn’t seem to be a shortage of ideas being
discussed for potential future macro volatility events. This
article examines the behavior of the VSTOXX®
/ VIX spread
during recent volatility events. Could the understanding
of the spread’s behavior during past volatility events offer
some insight for future events?
Liquidity is always important to an investor or trader.
Table 1 gives readers an overview of the VSTOXX®
Futures
liquidity over the last years.
Trading a spread is just another way of saying trading relative
value. An investor is simply going long one product and
short another product as they are seeking the spread price
or price differential between the two products to either
widen or narrow based on the position they are holding.
In the case of the VSTOXX®
/ VIX spread a trader may
go long VSTOXX®
Futures and short VIX futures when
the spread price is oversold or sitting at or near the bottom
of the range. A trader may sell VSTOXX®
Futures and
buy VIX futures when the spread is near the high end of
the range or considered overbought and finding resistance.
Since 2 January 2007, the VSTOXX®
/VIX spot spread
averages an estimated premium of 4.5 volatility points of
VSTOXX®
over VIX. The spread has traded below 2 about
19 percent of the time. The spot spread trades at negative
prices about 7 percent of the time. Therefore it is a low
probability for the spread to remain negative for an extended
period of time. When the spread is negatively priced it
tends to be more of a spike versus a sustained period of time.
When the VSTOXX®
/VIX spread rallies it also tends to spike
to the upside and it usually doesn’t sustain high price levels
for extended periods of time. Since 2007, the spot spread
price has been above 8, 11 and 14 about 14 percent,
3 percent and 0.7 percent of the time respectively. Just prior
and during the financial crisis was the only period since
2007 the spread remained negative for a prolonged period
of time as noted in Chart 1.
Part 2: VSTOXX®
/VIX volatility spread
behavior during recent volatility events
Table 1: VSTOXX®
Futures yearly volume and open interest as of Oct 2016
Total volume
7,908,599
7,226,833
6,962,188
5,324,708
3,901,530
1,889,492
431,669
14,715
YOY change
28.8%
3.8%
30.8%
36.5%
106.5%
337.7%
2,834.0%
12.0%
36,956
28,341
27,519
21,046
15,300
7,352
1,686
58
Open interest
290,901
108,132
173,986
184,900
224,061
68,088
58,700
1,304
2016
2015
2014
2013
2012
2011
2010
2009

22
20
15
10
5
0
-5
-10
-15
Jan 2007
1
European banks in need
of financial aid
S&P cuts Greek debt
to junk
Rumors over a possible bank
withdrawal freeze in Greece
NBER announced the U.S. economy
official recession
Dow opened
1,000 points down
Rumors of possible
Greek default
Brexit
Chart 1: Spread price of VSTOXX®
/VIX spot index spread 1 Jan 2009 to 9 Nov 2016
Often, when the VSTOXX®
/VIX spread widens, it is due to
one of the below items occurring:
1) EURO STOXX 50®
Index declines, causing VSTOXX®
volatility index to rally while the VIX may remain relatively
stable thus causing a widening spread price.
2) S&P 500 index rallies causing the VIX index to decline
while VSTOXX®
remains relatively stable equating to
a widening spread.
3) S&P 500 index declines and the EURO STOXX 50®
Index
declines causing both the VSTOXX®
and VIX indexes to
rally. However, VSTOXX®
will often rally at an accelerated
rate versus VIX thus widening the spread.
The VSTOXX®
/VIX spread may be utilized as a sentiment
indicator. If the spread is oversold or overbought it could
give an indication of how the individual volatility indexes
may behave in the near future to either narrow or widen
the spread price. A second derivative analysis of the spread
may imply that if the volatility indexes should move, it could
be a signal for direction of the respective underlying equity
markets. For example if the spread is priced above 11,
it would be considered very wide with an increased probability
for either VSTOXX®
Futures or VIX futures to move to
narrow the spread and what that may imply about the under-
lying equity market?
Chart 2 shows the spot price of VSTOXX®
and VIX indexes
along with VSTOXX®
/VIX spot spread. This gives a macro
picture of how the VSTOXX®
/VIX spread has behaved over
time. The spread tends to widen when the underlying
volatility indexes rally.
Chart 3 observes the 2008 rally of the volatility indexes
while the spread was frequently negative during that time.
This is one of the few times the VSTOXX®
/VIX spread
sustained a negative price for an extended period of time.
Chart 3 also shows when the volatility indexes have large
moves, the spread tends to remain within a range that
is relatively common within its price distribution. As the vola-
tility indexes gradually drifted lower in 2009, the spread
was still hovering around the low single digits.

23
90
80
70
60
50
40
30
20
10
0
-10
-20
Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016
VIXVSTOXX®
Spread
Chart 2: Daily spot price of VSTOXX®
and VIX indexes and VSTOXX®
/VIX spot spread 2 Jan 2007 to 9 Nov 2016
90
80
70
60
50
40
30
20
10
0
-10
-20
Jan 2008
VIXVSTOXX®
Spread
Jan 2009Jul 2008 Jul 2009Apr 2008 Apr 2009Oct 2008 Oct 2009
Chart 3: VSTOXX®
/VIX daily spot spread price 2 Jan 2008 to 31 Dec 2009

24
50
40
30
20
10
0
Jan 09
VIX Futures VSTOXX® Futures Spread Futures
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16
Chart 4: Daily prices of VSTOXX®
Futures, VIX futures and VSTOXX®
Futures/ VIX futures spread
2 Jun 2009 to 9 Nov 2016
Table 2 lists the average, median, maximum and minimum
VSTOXX®
/VIX spread price and the frequency of how often
the spread price is either above or below a specific spread
price. For example, 0.8 percent of the time the spot spread
price is above 14. The pricing and the frequency of spot
versus futures VSTOXX®
/VIX spreads are similar. VSTOXX®
Futures began trading 2 June 2009, which is the starting
date of this analysis to compare the spread statistics of the
spot price to the futures price.
Chart 4 shows the daily prices of VSTOXX®
Futures, VIX
futures and VSTOXX®
Futures / VIX futures spread since
inception of the VSTOXX®
Futures contract. It is very similar
to the spot prices in Chart 2.
27 April 2010 Standard and Poor’s downgraded the Greek
debt to junk and downgraded the sovereign debt of
Portugal. It was only a few weeks earlier the Greek debt was
previously downgraded1. As this occurred both volatility
indexes rallied, but VSTOXX®
Futures lead the way and
maintained a widening premium over VIX futures causing
the spread to go from 2.72 on 21 April 2010 to exceed
a spread price of 10 by 7 May 2016.
A spread price in the teens is considered a tail event and
usually is difficult for that price to be sustained for an extended
period of time (as noted in Table 2). In Chart 5 the price
traded in a range around 10 to a range around 5 a few times
before finally narrowing. By 19 May 2010 the volatility
indexes peaked and began a slow decline into the summer
months. And the spread also declined into early July.
In the spring /early summer of 2015 the spread was gradu-
ally widening (Chart 6) due to rumors of controls on
the Greek banks. During this time VIX futures remained stable
hovering around 15 while VSTOXX®
Futures traded both
higher and lower due to the increased European uncertainty.
This triggered the VSTOXX®
/VIX spread to widen and narrow.
Table 2: Statistics of daily spot and front month futures of VSTOXX®
/VIX spread 2 Jun 2009 to 9 Nov 2016
Avg
5.5
4.7
Median
5.0
4.4
Max
20.53
17.78
Min
–2.70
–1.88
<0
0.9%
0.7%
<2
7.5%
10.9%
>8
18.9%
10.2%
>11
3.6%
0.8%
>14
0.8%
0.1%
Spot
Futures
1 http://money.cnn.com/2010/04/27/news/international/Greece_debt_downgraded/index.htm

25
35
30
25
20
15
10
5
0
Spread FuturesVSTOXX®
Futures VIX Futures
Mar 2015 Apr 2015 May 2015 Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015
Possible Greek bank
withdrawal freeze
DJIA opens 1,000
points lower
Futures / VIX futures spread
3 Mar 2015 to 31 Dec 2015
Monday 24 August 2015 the Dow Jones Industrial Average
opened 1,000 points lower. The declining U.S. equity markets
triggered a decline in global equity markets and rallying of
volatility indexes. The VSTOXX®
Futures/VIX futures spread
came close to going negative at 0.925 on 25 August 2015.
The price of the spot spread actually did go negative at
–2.3715. This narrowing of the spread may be attributed
to the VIX futures rallying faster than VSTOXX®
Futures.
As noted in Table 2 the futures spread price is negative
0.7 percent of the time. Only 11 percent of the time is the
futures spread priced below 2. The price didn’t remain low
for long. By 2 September 2015, the spread price rallied above
5 as VIX futures declined faster than VSTOXX®
Futures.
45
40
35
30
25
20
15
10
5
0
Spread Futures VSTOXX®
Futures VIX Futures
Jan 2010
M
Feb 2010 Mar 2010 Apr 2010 May 2010 Jun 2010 Jul 2010
S&P cuts
Greek debt
to junk
Futures, VIX Futures and VSTOXX®
Futures/ VIX Futures spread Jan to Jul 2010

26
45
40
35
30
25
20
15
10
5
0
Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016
Brexit
Spread FuturesVSTOXX® Futures VIX Futures
Futures/ VIX futures spread
1 Mar 2016 to 31 Oct 2016
One of the top trending words in 2016 was “Brexit”2. Brexit,
a referendum on 23 June 2016 to determine if U.K. citizens
wanted to leave the European Union (EU) was forecasted
by polls and betting sites to stay in the EU. In April and
May 2016, VIX futures remained relatively stable in the range
of 15 to 17. However VSTOXX®
Futures traded in the range
of the low 20s to the high 20s. As time moved closer to the
day of election, the VSTOXX®
/VIX futures spread gradually
widened as VSTOXX®
Futures moved higher.
VSTOXX®
Futures peaked 15 June 2016 at 37.62. The spread
also peaked at 17.72. Once the votes were cast, the result
was to leave the EU; a surprise to many. The equity markets
reacted with fast declines. As both volatility indexes rallied,
the spread remained capped in the 8 to 10 range. The down-
side volatility diminished after the initial sell off and
both volatility indexes gradually moved lower and the
spread narrowed.
In discussing the VSTOXX®
/VIX futures spread, there is
a mechanical component that has to be derived to deter-
mine how many futures contracts need to be entered
for each leg of the spread. There is a difference in the size
of the two futures contracts. One volatility point in VSTOXX®
Futures = EUR 1003. Whereas, one volatility point in VIX
futures = USD 1,0004. Without adjusting for foreign exchange
differentials, a VSTOXX®
Futures contract value is 1/10
the size of a VIX futures contract.
2 https://www.google.com/trends/explore?q=brexit
3 http://www.eurexchange.com/blob/269082/3860c6d6df82b8b2e42b46ef02043a49/data/factsheet_eurex_vstoxx_derivatives.pdf
4 http://cfe.cboe.com/products/spec_vix.aspx

27
Table 3: Conversion ratio of the number of VSTOXX®
Futures to VIX futures
USD
USD 1.50
USD 1.40
USD 1.30
USD 1.10
USD 1.05
USD 1.00
USD 0.95
USD 0.90
USD 0.85
Ratio
0.667
0.714
0.769
0.909
0.952
1.000
1.053
1.111
1.176
Multiplier
10
10
10
10
10
10
10
10
10
VSTOXX®
Contracts
6.67
7.14
7.69
9.09
9.52
10.00
10.53
11.11
11.76
EUR
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
EUR 1.00
Source: Shore Capital Research LLC
Table 3 calculates the ratio of how many VSTOXX®
Futures
contracts are needed for the spread per each VIX futures
contract and adjusting for foreign exchange. For example if
EUR and USD were at par, the ratio would be 10 VSTOXX®
Futures contracts are required for each VIX futures contract
in the spread. As the USD appreciates versus the EUR,
the ratio increases. As the USD depreciates versus the EUR
the ratio of VSTOXX®
Futures contracts needed per each
VIX futures contract decreases.
In summary, VSTOXX®
/VIX spread tends to maintain similar characteristics from one macro
volatility event to the next. A spread price below 2 is considered support and may offer
opportunities to buy the spread or unwind a short spread with the exception of the financial
crisis. When the spread is priced in the high single digits or higher it is considered resistance
and may be an opportunity to sell the spread or unwind a long position. Often the spread
will move higher as VSTOXX®
Futures leads the rally of the two volatility indexes. Analyzing
how the VSTOXX®
/VIX spread behaves during macro volatility events may offer some insight
for future macro volatility events.

28
Why replace VSTOXX®
options with options on
VSTOXX®
Futures?
As appetite for European Volatility continued to grow in
2016, U.S. participants have expressed interest in accessing
listed VSTOXX®
options. The current version is under
the jurisdiction of the SEC and not available to trade in
the U.S. However, some U.S. market participants trade
VSTOXX®
options on the OTC market, making the Eurex
listed VSTOXX®
options a secondary market. Under the SEC
no-action relief VSTOXX®
options are only available
to a Qualified Institutional Buyer (QIB), not allowing
for direct market access. The new CFTC-certified OVS2
will allow for wider market participation.
Highlights of the OVS2 contract specifications include:
1) EUR denominated
2) Currently the OVS contract has a European-style exercise
OVS2 will be American style exercise, allowing the option
to be exercised anytime during the life of the contract.
3) Currently the OVS is cash settled. The new OVS2 contract
will be physically delivered to a VSTOXX®
Futures
contract that expires on the same day. VSTOXX®
Futures
are cash settled.
Part 3: Introduction of CFTC-certified
options on VSTOXX®
Futures
Table 1: VSTOXX®
Futures yearly volume and open interest as of Nov 2016
Total volume
9,030,160
7,226,833
6,962,188
5,324,708
3,901,530
1,889,492
431,669
14,715
YOY change
35.9%
3.8%
30.8%
36.5%
106.5%
337.7%
2,834.0%
12.0%
38,263
28,341
27,519
21,046
15,300
7,352
1,686
58
Open interest
269,249
108,132
173,986
184,900
224,061
68,088
58,700
1,304
2016
2015
2014
2013
2012
2011
2010
2009
On 1 February 2017, Eurex Exchange will introduce a new CFTC-certified options on VSTOXX®
Futures contract (OVS2). The VSTOXX®
Futures volatility index will be the underlying market
for the new options contract. OVS2 will have eight consecutive expiring months. The underlying
equity market for VSTOXX®
Futures is the EURO STOXX 50®
Index.
Since the inception of VSTOXX®
Futures in 2009, volume
and open interest continues to grow as noted in Table 1.
In 2016 VSTOXX®
Futures experienced some days and
months of large volume and open interest. The most
salient example occurred around the Brexit referendum.
Total contracts traded in June 2016 were 1.24 million.
A 62.1 percent increase from a year earlier and a 62.4
percent increase from the previous month. The futures
volume experienced another increase recently around
the U.S. election on 8 November 2016 and again leading up
to Italy’s constitutional referendum on 4 December 2016
resulting in a 1.12 million contracts traded in November
2016 for a 120.7 percent increase from a year earlier
and a 37.1 percent increase from the previous month.
In 2012 Eurex began trading VSTOXX®
options (OVS)
with the VSTOXX®
index as the underlying market. When
OVS2 begins trading in February 2017, initially both option
contracts will trade simultaneously. As of 1 February 2017,
the listing of new expiration months for VSTOXX®
options
(OVS) will be discontinued1. As each new OVS2 expiration
month is introduced, the OVS options will be gradually
phased-out during the eight-month period2. By the end of
the eight months OVS will be completely replaced by OVS2.
1 https://www.eurexchange.com/blob/2766088/12a844b3191c02d89d15bf094e920018/data/er16098e.pdf
2 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/New-U.S.-Approved-VSTOXX-Options-To-Launch-February/2774230

29
Source: Eurex
Key Benefits
1. Investors with EUR denominated equity exposure
do not have currency risk and exposure.
2. As a CFTC-certified product it is directly accessible
to all U.S. traders and investors. Currently the OVS
contracts are only available to QIBs.
3. It offers investors a targeted and leveraged channel to
reflect their views on EURO STOXX 50®
Index volatility.
4. As the research showed in my paper “Utilizing a European
volatility index for Pan-European volatility” (page 15),
VSTOXX®
Futures may be employed for volatility
of several European equity indexes and therefore
options on VSTOXX®
Futures could also be applied for
the same goal.
5. In several articles, I’ve discussed the VSTOXX®
/VIX spread.
Now you can trade options on the VSTOXX®
leg of the
futures spread instead of only utilizing a futures contracts.
6. OVS2 offers opportunities to deploy strategies that utilize
both futures and options.
7. Options on VSTOXX®
Futures features the same benefits
of any exchange traded contract:
– Market-to-Market transparency.
– Offering liquidity for hedgers and investors.
– Regulated exchange and market.
– Central clearing of transactions: reducing counterparty
default risk.
– Price discovery of the market.
– Standardized trading hours and contract specifications.
Table 2 notes a greater detail of comparison between
the current OVS and the new OVS2 options.
OVS
VSTOXX®
Options
The VSTOXX®
Index
EUR 100 per VSTOXX®
Index point
In points with two decimal places. The minimum price change is 0.05 points
(equivalent to a value of EUR 5).
The next eight successive calendar months
European-style; an option can only be exercised
on the final settlement day of the respective option
series until 21:00 CET.
Premium-style
Cash settlement, payable on the first exchange day
following the final settlement day.
Established by Eurex, determined through a binomial pricing model.
On the expiration day of the underlying futures contract, which is 30 calendar days prior to the third Friday
of the expiration month of the underlying options. This is usually the Wednesday prior to the second last
Friday of the respective expiration / maturity month, unless this is not an exchange trading day. In this case it
is the day before.
8:50 –17:30 CET
Available for European-style exercise and cash settlement (OV6S)
0.30 EUR (on book)
0.30 EUR (off book)
500 contracts
Symbol
Product name
Underlying
Contract value
Price quotation and
minimum price change
Contract months
Exercise
Margin
Settlement
Daily settlement price
Last trading day and
final settlement day
Trading hours
Flex functionality
Fees
Block trade size
Table 2: Comparing contract specifications between VSTOXX®
options (OVS) and options on VSTOXX®
Futures (OVS2)
OVS2
Option on VSTOXX®
Futures
VSTOXX®
Futures
American-style; an option can be exercised until
the end of the post-trading full period on any
exchange day during the lifetime of the option.
Futures-style
Futures settlement, options settle into futures and
immediately settle into cash, payable on the first
exchange day following the final settlement day.

30
When volatility begins to show up in the VSTOXX®
index,
it tends to experience greater moves in the spot, front
and nearby futures months than what is often experienced
in the back months as the curve moves from contango
to backwardation (spot is priced higher than back months)7.
1) An investor could buy calls in the front month and buy
puts in the back months with the expectation of
a larger move in the front month versus the back month
if the market is in contango.
2) An investor could buy calls in the front month and sell
puts in the back months. Similar to strategy No. 1,
but realizing the entire curve could move higher if the
market goes from contango to backwardation allowing
the investor to receive some premium for selling the put.
3) The investor could sell puts in the front month to receive
some premium and the expectation the front month may
move higher.
4) An investor could buy puts in the back months as the price
of the back months may decline as they move closer to
expiration assuming a contango term structure.
5) If the futures term structure is in backwardation for
an extended period of time, an investor may determine
if they should either buy puts or sell calls in the front
month or nearby month with the perspective of the
VSTOXX®
Futures potentially moving lower.
Per the BNP Paribas SA Eurozone Political Risk Index,
political risk is increasing in Europe while the VSTOXX®
index declined in the past several weeks3. This plays
into potential future macro events related to the upcoming
European elections.
In a 24 November 2016 ECB press release of their semi-
annual Financial Stability Review discussing “systemic risks
to financial stability over the next two years”, one of the
four risks included financial contagion induced by increased
“political uncertainty in advanced economies and continued
fragilities in emerging markets”4.
The November Centre-right primaries in France could be
considered the beginning of the election season across
the EU for the next year. Followed quickly by the Italian
constitutional referendum and the Austrian Presidential
election both held 4 December 2016. Over the course of
the next year general elections will be held in the Nether-
lands, France and Germany. September 2017 a referendum
is planned for Catalonia’s independence from Spain5.
2017 could see changes in European heads of state and
controlling parties of various governments. Could this
sustained uncertainty induce more volatility and nervousness
into the European capital markets and potentially develop
macro events? If so, how could these events or increased
uncertainty impact VSTOXX®
Futures and options on
VSTOXX®
Futures?
Potential ideas to think about regarding trading OVS2
The term structure of VSTOXX®
Futures is frequently in
contango (spot price is less than futures prices). As discussed
in my article “Forward curves of European and U.S.
volatility index futures” the first three months of VSTOXX®
Futures are in backwardation about 15 percent of the time6.
3 https://www.bloomberg.com/news/articles/2016-11-23/europe-stock-volatility-underprices-rising-political-risk-chart
4 http://www.ecb.europa.eu/press/pr/date/2016/html/pr161124.en.html
5 http://www.marketwatch.com/story/all-the-potential-political-risks-looming-in-europe-in-one-chart-2016-11-14
6 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/689758/forward-curves-of-european-and-us-volatility-index-
futures/?wt_mc=group.newsletter.editorial_vstoxx_en.vstoxx_outlook_2013_11_2013-11-05-21:43_690736
7 http://www.eurexgroup.com/group-en/newsroom/vstoxx-outlook/vstoxx-volatility-behavior-when-european-equities-
rally/1176180/?wt_mc=ussm.LinkedIn.vstoxxnl.en.ms.vstoxxnl12172014

31
32.00
30.00
28.00
26.00
24.00
22.00
20.00
10.00
16.00
14.00
1
Backwardation
6 Oct 2014 16 Oct 201410 Oct 201419 Jun 2014 19 Sep 2014
2 3 4 5 6 7 8 9
Contango
Chart 1: Evolution of the volatility regime shift of VSTOXX®
spot and VSTOXX®
Futures
Source: Shore Capital Research LLC
Chart 1 illustrates a general guideline how the VSTOXX®
Futures term structure may shift from contango to back-
wardation. Even though the entire curve moved higher
as market sentiment shifted towards more uncertainty,
the implied volatility may move quickly in VSTOXX®
spot
and the front months of VSTOXX®
Futures as discussed
in my article “An analysis of why volatility indexes
are relevant”.
VSTOXX®
spot is the first moment in Chart 1. The front
month of VSTOXX®
Futures is the second moment.
The remainder of the term structure are three through nine.
During the summer of 2014, EURO STOXX 50®
Index moved
from a rallying market to choppy market and then selling
off into the fall of 2014. The VSTOXX®
Futures structure
followed the views of the equity market. In June 2014, the
VSTOXX®
term structure was in contango. By October 2014,
VSTOXX®
Futures term structure shifted to backwardation.
In summary, options on VSTOXX®
Futures will allow for greater market participation and greater
choices of strategies for hedgers and investors for directional trading, spreading or as a hedge to
their portfolio and trading volatility.

32
Prior to founding Shore Capital Research, Mr. Shore was
Head of Risk for Octane Research Inc (USD 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 (USD 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.
About Mark Shore
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
Shore Capital Research LLC 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 Manage-
ment 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.

Articles –
Real life applications
These are the great real life illustrations of what has been discussed
in Part 1. Articles cover hedging strategies, directional, spreading
and event-driven trading.

34
Manceau noted that although some investors
are still actively trading the spread, the current levels
make it difficult to capture the entire range.
“The spread effectively showed potential this year and
went to unseen territories by printing above 20.
Spread is now sitting around 8 which is still the highs
of the historic range if you back test it. It has some
downside potential and can compress to sub-4 if realised
volatility continues to be low. A lot of people that
were active in the spread don’t want to get in right
“It’s a smart way to be long risk but given that trade
involves selling vol of vol it’s not as attractive from
a vol standpoint as the vol of vol is quite low now on
the VSTOXX®
. These are pure directional plays to
get long without spending any premium,” said Gabriel
Manceau, VSTOXX®
trader at Morgan Stanley
in London. As reported by EQDerivatives earlier this
month, there is continued interest from portfolio
managers in the VSTOXX®
/VIX spread with the term
structure in the former index largely flat versus
an upward sloping term structure in the latter index.
Robert McGlinchey:
Directional VSTOXX®
Options flow spikes
on Friday as event risk grows nearer
Published: 26 July 2016 | Eurex Exchange
Portfolio managers were active in upside VSTOXX®
structures in Nov. and Dec. maturities on Friday
in the expectation of a higher volatility regime in Europe for the rest of the year as local event
risk including the Italian Referendum and the publication of the latest E.U. bank stress tests grows
nearer. Two sizeable option trades in the VSTOXX®
were executed on Friday, with investors actively
buying Nov. and Dec. call spreads to sell puts. Traders also highlighted interest in naked call buying
in the VSTOXX®
as directional positioning increased going in to the afternoon session.
About Robert McGlinchey
Robert is director and co-founder of EQDerivatives, Inc.
Previously derivatives editor of GlobalCapital, and managing
editor of Derivatives Week, Euromoney Institutional
Investor, Robert has covered the derivatives market across
all asset classes in the Americas, Europe and Asia Pacific.
Robert has experience in launching a host of leading
derivatives events and supplements, as well as surveys and
rankings. He regularly chairs industry conferences focused
on the equity derivatives market and industry regulation.
A graduate of St. Mary’s College, University of Surrey,
he’s based in London.

35
investors an attractive instrument to hedge event risk
in Europe, even though the average vega traded via
VSTOXX®
instruments up to six month tenors compared
to EURO STOXX 50®
Options is around 10 percent.
“The VSTOXX®
offers another alternative to investors and
some people have taken advantage of the opportunities
in the product. For example, July Options in SX5E were only
listed last month but the VSTOXX®
June Future had been
trading well before that, so you could have put a position
specifically around a July event using June Futures before
the EURO STOXX®
Options were available,” noted Deb.
Aside from Futures spread trading in the VSTOXX®
and
directional options positioning in the product, flow
in strategies to participate in the VSTOXX®
/VIX spread
has remained subdued. Deb added that although you
could view the VSTOXX®
/VIX spread as having moved
to a higher average, the depressed level of volatility
in the U.S. may deter some investors.
Abhinandan Deb, head of EMEA equity derivatives research
and cross-asset quantitative investment strategies at Bank
of America and Merrill Lynch in London, told EQDerivatives
that the June expiry, for example, has seen a vol differential
to its neighbouring expiries being more than four vol points,
which is a rare occurrence.
“A lot of people have been curious around the big kink
in the VSTOXX®
curve. Before this kink got that big, i.e. two
months ago, there was little difference between the May
and the June future, but in mid-April, the June vs. May
future spread rose to more than four vol points. Spread
trading in VSTOXX®
Futures has afforded another way for
investors to position for the risk of Brexit,” said Deb.
Over the last week, investors have increasingly been rolling
protection out to September in the EURO STOXX 50®
,
targeting not only the potential of Brexit, but also risk
surrounding central bank meetings and the Spanish general
election. The VSTOXX®
, however, is continuing to offer
According to latest monthly statistics from Eurex,
685,705 VSTOXX®
options contracts were trading in June,
up from 250,011 in May. In VSTOXX®
futures,
meanwhile, 1,241, 817 contracts were traded in June,
up from 764, 674 contracts in May.
At close on Friday, the VSTOXX®
sat at 19.11,
according to Bloomberg.
now and are waiting for better levels. They are also
waiting for a dip in the U.S. where the VIX will react
violently and make the spread flat, which is what
happened in 2015. That’s where people will want to put
the trade on. So at the moment, you have to be careful
playing this spread,” added Manceau.
VSTOXX®
Futures spreads garner interest
as key events near
Published: 12 May 2016 | Eurex Exchange
Portfolio managers have shown increased interest in trading VSTOXX®
Futures spreads in an effort
to profit from the vol differential between monthly expiries. Although the EURO STOXX 50®
continues to be used primarily to hedge event risk, others are finding greater value in using
the VSTOXX®
as a way of positioning around the E.U. referendum. Elsewhere, investors are showing
greater interest in 1؋2 put ratios on VSTOXX®
June Futures.

36
About EQDerviatives
EQDerivatives, Inc. is a research and commentary provider
focused on the institutional equity and volatility derivatives
market. Our content is delivered to the buyside, sellside and
asset owners.
We deliver detailed, high-quality commentary and research
that clients can use to make sense of what is moving the
market now. Our research will sharpen business development
for product providers and their customer acquisition and
retention strategies.
“The U.S. equity market has recently flirted with all-time
highs, but that’s not the case with the European market.
There are people that expect a higher average level in
the VSTOXX®
/VIX spread, but get concerned that the VIX
has been ultra low as they are somewhat sceptical of
further U.S. market upside. So there will be some hesitation
in investors acting upon expecting a higher VSTOXX®
/VIX
average,” said Deb.“That’s not to say that the trade is
not profitable and people are still looking at it as a technical
and more strategic trade.”
Separately, hedge funds and institutional investors are
showing interest in 1ϫ2 put ratios on June VSTOXX®
Futures after the recent vol rally in Europe. It followed
a JPMorgan research report highlighting that June Futures
have been trading around 28 in recent days with a rally
unlikely to go beyond 30 as it would coincide with
a recessionary scenario. The downside for the VSTOXX®
is likely to be higher than 20, meanwhile, as June Futures
are bounded below by the EURO STOXX 50®
June-July
forward volatility, which will be well supported due to
the E.U. referendum, the report noted.

37
Guyon, is recommending investors sell VSTOXX®
November
puts to buy VSTOXX®
December 26/30 call spread. The view
from Société Générale is that the Nov. VSTOXX®
contract will
continue to trade at elevated levels while the Dec. futures
should spike on a ‘no’ vote outcome in the referendum.
“It makes sense to sell a VSTOXX®
November put as it expires
before the result. As the polls are very close, we are confident
the VSTOXX®
won’t reset below the put strike at least until
the election day. On the other hand, by being long the call
spread of VSTOXX®
December you will be able to benefit
from a spike in volatility that could occur after the election
if the ‘no’ vote wins. Looking back at Brexit, a similar
structure, trading near flat premium, would have been
in the money post referendum result,” added Guyon.
During Friday morning trading, the VSTOXX®
was trading
at 21.1, according to Bloomberg.
A strategy to sell a VSTOXX®
Nov. put option to fund
the purchase of a VSTOXX®
December call spread is pricing
attractively as a hedge against the potential of heightened
volatility surrounding the upcoming Italian referendum.
The Italian Constitutional Referendum, which is set to take
place sometime in November, is aimed at reducing the
fragmentation in Italian politics. Prime Minister Matteo Renzi,
is confident that the upcoming referendum will not mirror
Brexit. However, the Italian media are reporting Renzi is likely
to push back the vote due to polls showing a majority ‘no’
vote. He has released a statement setting out that that he
will quit his position if he loses the referendum later this year.
“We’ve seen that the polls have been increasingly showing
the ‘no’ vote as a possible outcome for this referendum.
Therefore, we think that there is an inkling that the vote
could create additional political troubles in Italy and impact
on the rest of Europe,” said Herve Guyon, from Flow
Strategy and Solutions team at Société Générale in London.
Georgia Reynolds:
EMEA: Selling Nov. VSTOXX®
put to buy
Dec. call spread pricing attractively
Published: 22 August 2016 | Eurex Exchange
Georgia Reynolds
is a reporter, EMEA, at EQDerivatives, based in London.
In her role, Georgia covers vanilla futures and options flow
across single stocks, indices, dividends and ETFs across
Europe. On the buyside, she focuses on EMEA flow strategies,
new fund launches and risk premia investing. Georgia
also covers European regulation surrounding MiFID II, EMIR,
PRIIPs, TLAC and capital requirements. A recent graduate
from City University London, Georgia has been studying
and producing print and multimedia journalism for five years.
Georgia can be reached at +44 203 865 0987 or
reynolds@eqderivatives.com.
.

38
think that the uncertainty premium around the U.S. election
will likely provide support to the October VIX future
so we are happier selling puts there.”
According to BAML research, V2X Oct roll-down is currently
more attractive than usual compared to VIX roll-down.
In fact, VIX roll-down is typically more lucrative, motivating
systematic long VSTOXX®
short VIX futures strategies.
Deb is recommending clients to trade long 895 contracts
of V2X Oct16 21 puts (~90%, fut ref: 23.25) per
1,000 contracts of short VIX Oct16 16 puts (~90%, fut ref:
17.45) for a small upfront credit (equal $vega sizing).
“If you go long VSTOXX®
October puts like we are recom-
mending tactically, you benefit from potential roll-down or
a decline in the VSTOXX®
future,” added Deb. He continued
to explain: “The reason we are doing this is because
we think that the Italian referendum no longer has a direct
bearing on the October future for VSTOXX®
whereas
it does for the November contract. If we do see a risk on
equity rally before then, then there is a great deal of carry
to be had from rolling down the VSTOXX®
future in
the coming weeks.”
Greater clarity on the Italian referendum date has created
a tactical opportunity to trade VIX/VSTOXX®
relative value,
specifically by going long VSTOXX®
puts and short VIX
puts in October maturities. The VSTOXX®
Oct futures will
unlikely be directly impacted, while the VIX Oct futures
will likely be supported given U.S. elections according to
Bank of America Merrill Lynch.
VIX futures in October are screening historically low
vs. VSTOXX®
Oct futures despite the VIX October future
settling to volatility encompassing the U.S. election.
Given relatively low realized volatility over the summer
in both markets, the front end of both VIX and VSTOXX®
curves have been pinned down, with record roll down
in the VSTOXX®
future relative to the VIX according to
Abhinandan Deb, head of EMEA equity derivatives
research and cross-asset quantitative investment strategies
at Bank of America Merrill Lynch in London.
“Our tactical view is that we prefer buying puts on the
VSTOXX®
October future and selling puts on the October
VIX future,” said Deb. He continued: “This is because we
Italian referendum date clarity adds to
favorable long VSTOXX®
short VIX RV play
Published: 26 September 2016 | Eurex Group, Eurex Exchange
elevated April 2017 contract. The difference in implied
volatility between VSTOXX®
Jan. 2017 expiry and April 2017
is greater than three volatility points and gives investors
the opportunity to benefit from an increase in near dated
volatility, but without the usual carry costs of long volatility
positions, according to the strategists.
The Italian referendum on December 4 will see Italians vote
on plans to reduce the size and powers of the Italian Senate
Despite near term macro risks, such at the Italian con-
stitutional referendum and the upcoming French election,
EURO STOXX 50®
volatility futures term structure
is the steepest it has been in over three years, prompting
an increase in VSTOXX®
futures and options trades.
Should volatility rise over the next week, strategists
at Deutsche Bank in London think the VSTOXX®
Jan. 2017
expiry could rise more than twice the increase in the already
VSTOXX®
term structures at three year
highs, despite macro risks
Published: 3 November 2016 | Eurex Exchange

39
Bennett is specifically recommending going long Jan-17
futures vs. short 2ϫ Apr-17 futures, as near-dated implied
volatility has a higher beta to the overall level of volatility,
than far-dated implied volatility. “The reason of shorting 2ϫ
Apr-17 against each 1ϫ Jan-17 bought, is that you would
find its near-dated end of volatility tends to move around
more” should be “The reason of shorting 2ϫ Apr-17
against each 1ϫ Jan-17 bought, is that you may find the
near-dated end of volatility tends to move around more,”
he told EQDerivatives. “So, (therefore) it may be appropriate
only go long one of the near term, and short two of
the far term.”
Five month – two month term structure of over three
has only been seen 15 times since 2010, and the trade
is profitable 80% of the time, he added. In addition
to being proﬁtable, on average the risk reward is attractive
with the maximum 8.7 proﬁt being 5.4ϫ the max 1.6 loss,
he said. While this term structure has not been above 3pts
for over three years, Bennett added that it rose above it
on November 18. This is why that now could be statistically
a good time to put on the trade, he noted in his latest report.
to keep in line with EU standards. Elsewhere, the French
presidential elections will be conducted in two stages with
the first taking place on April 23 next year. The second
round, a fortnight later, is a runoff between the two candi-
dates with the most votes. Both elections have the potential
to fundamentally change the nature of the EU. VSTOXX®
market makers have seen larger trades recently, with
36,200 futures and 55,454 puts changing hands Tuesday.
Jamie Cassidy, head of index options Europe at SIG
Susquehanna International Group in Dublin, said the main
trade yesterday in the VSTOXX®
was a buyer of 20,000
17 strike puts for 12.5c. He added another 8,000 traded
Wednesday at the same level. “Notable given the VSTOXX®
futures were 2% lower at the time of the 2nd trade.
Currently Dec. straddle for the VSTOXX®
is 3.30 or 15.7%,”
Cassidy said.
Colin Bennett, strategist at Deutsche Bank in London,
explained the trade is very topical right now because
everyone has been looking at what is the best way to play
volatility over the referendum. With the French election,
there are concerns that there is potentially going to be
an outcome that will cause greater volatility, he said.
Upon forming the spread, investors can capitalize on
the steep roll-down of VIX futures (relative to VSTOXX®
)
while managing their risk with European volatility partially
hedging the exposure to curve shifts.
The spread strategy is often misunderstood by people
as being a directional strategy, but the performance is mostly
driven the relatively higher roll cost in U.S. volatility vs. EU
volatility, noted Christian Kober, European equity derivatives
strategist at Barclays in London. The futures shift, which
is a directional component related to the market, is essentially
unpredictable.
The Barclays VIX/VSTOXX®
volatility futures spread strategy,
which has returned near 20% YTD, is expected to continue
to produce positive returns over the next month as high-
lighted by the firm’s timing signals.
The aim of the short SPVXSTR, long VST1MT strategy is
to harvest the relative term structure premium in VIX futures
vs. VSTOXX®
futures. To do so, it sells a portfolio of VIX
futures with average maturity of 1M and buys a portfolio
of VSTOXX®
futures with the same average maturity
in the same notional. In keeping the maturity constant, each
leg incurs a roll cost (which can be positive or negative).
The basic premise of the strategy is that the roll cost
is consistently higher in the VIX relative to the VSTOXX®
.
Barclays signals show VIX/VSTOXX®
futures spread strategy
to continue outperforming
Published: 14 September 2016 | Eurex Group, Eurex Exchange

40
Barclays continues to invest in the further development
of the strategy by adding trading signals. The idea is
to dynamically change the notional invested in the strategy
based on a relative volatility momentum signal.
Investors have been accessing the strategy through swaps,
with Kober adding that new clients are increasingly keen
to add exposure to the strategy.
“The relative roll income is consistent over time and com-
pensated the futures shift when it was detrimental to the
performance. Hence the experience this year is not unusual
and this is what you expect it to do,” said Christian Kober,
European equity derivatives strategist at Barclays in London.
Investors note that trading volatility between U.S. and
Europe systematically in the form of volatility futures
is innovative compared to many products from other dealers.

Contacts
For further information please contact
Sales Europe
Vincenzo Zinnà T +41-43-430-7125
vincenzo.zinna@eurexchange.com
Sales United Kingdom
Murat Baygeldi T +44-20-78 62-72 30
murat.baygeldi@eurexchange.com
Sales U.S.
Megan Morgan T +1-312-544-10 83
megan.morgan@eurexchange.com
Sales Buy Side U.S.
Laurent Partouche T +1-212-309-93 02
laurent.partouche@eurexchange.com
Sales Asia & Middle East
Jan Thorwirth T +852-25 30-78 07
jan.thorwirth@eurexchange.com
41

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8,000micro-earthquakes every day.
Around the world, there are
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