Volatility is one of the most important indicators on the financial markets and influences not only the pricing of securities, but also the strategy of investors and traders. While the US VIX index is the best-known volatility indicator worldwide, there is a comparable instrument in Europe, the VSTOXX, which relates specifically to the European stock market. Trading options on the VSTOXX offers both hedging and speculative opportunities and can be a valuable addition to risk management and portfolio optimization. We explain all the details about trading VSTOXX options in this blog post.
What is the VSTOXX?
The EURO STOXX 50 Volatility Index (VSTOXX) measures the expected fluctuation range of the Euro Stoxx 50the leading share index in the eurozone. Its calculation is based on the implied volatilities of the options listed on the Euro Stoxx 50 with a remaining term of 30 days. The VSTOXX thus provides an indication of the extent to which market participants expect prices on the European stock market to fluctuate in the near future.
Blog Tip: The most important volatility indices for options traders
As with the VIX, the values of the VSTOXX rise sharply in times of economic or political uncertainty, as market participants price in higher hedging costs. In calm market phases, on the other hand, the VSTOXX remains low as the expected volatility is low. Investors can take targeted positions via options on the VSTOXX in order to either profit from fluctuations or protect their portfolio from market turbulence.
Why trade VSTOXX options?
Trading VSTOXX options offers investors several advantages. Especially for investors with a strong exposure to the European equity market, the ability to hedge against increases in volatility can be an important part of risk management. Options on the VSTOXX enable both defensive and speculative strategies.
A key advantage of VSTOXX options lies in their negative correlation to the stock market. As a rule, the VSTOXX rises when prices in the Euro Stoxx 50 fall. Therefore, call options on the VSTOXX can serve as a kind of insurance to compensate for losses in the equity portfolio. On the other hand, there are various strategies for traders who want to bet on falling volatility in order to benefit from a market calming after turbulent phases.
Unlike traditional equity options, however, volatility products are often less intuitive. The value of a VSTOXX option depends not only on the expected fluctuation range of the Euro Stoxx 50, but also on other factors such as the current market environment, the general interest rate level and the remaining term of the option.
| VIX | VSTOXX | ||
|---|---|---|---|
| Future/index option | Future options | Index options | Index options |
| Settlement | physical | cash | physical |
| Exercise type | American | European | American |
| Multiplier | 1.000 | 100 | 100 |
| TWS abbreviation | VIX | VIX | V2TX |
| Currency | USD | USD | EUR |
Strategies for trading VSTOXX options
There are various strategies with which investors can use VSTOXX options. Depending on the market assessment, a strategy can be useful for hedging, speculating on rising or falling volatility or achieving regular premiums.
1. hedging against market turbulence
For investors with a portfolio of European equities, the purchase of Long calls on the VSTOXX serve as a hedge. If the market were to fall sharply, volatility would presumably rise, causing these calls to increase in value. In this way, potential losses in the equity portfolio can be partially or fully offset.
An alternative is the use of Bull Call Spreads, where a call with a lower strike price is bought and a call with a higher strike price is sold. This strategy reduces the cost of hedging, but also limits the profit potential. For option writers, the sale of put options or the trading of several option legs as a spread combination would also be an option.
We at Eichhorn Coaching publish in our digital Option letter every two weeks in the "Volatility Barometer" section for an up-to-date overview of trading opportunities in volatility trading!
2. speculation on rising or falling volatility
Traders who anticipate an imminent market dislocation can profit from rising volatility with long calls or the sale of put options.
Conversely, a short volatility strategy can make sense if it is assumed that the markets will calm down after a turbulent phase. In this case, short call spreads or bear call spreads can be used to profit from falling volatility. These strategies have the advantage that they generate regular premium income, but are associated with the high risk of a sudden increase in volatility.
Free live webinar!
Alexander Eichhorn from Eichhorn Coaching looks at the global futures and options markets at CapTrader and analyzes in particular possible opportunities and risks for option writer strategies (options). Take the opportunity to look over the shoulder of an experienced options trader and see how he assesses the current market situation and what conclusions he draws from it. Log in here
Special features of trading with VSTOXX options
Trading VSTOXX options differs from VIX options in several aspects. While there are two different products available for VIX - VIX index options and VIX future options - trading in VSTOXX options is based exclusively on VSTOXX futures.
This means that an in-the-money VSTOXX option is not settled in cash at maturity, but results in the delivery of a VSTOXX future. A buyer of a call option thus receives a long position in the VSTOXX future, while the seller is allocated a short position. This physical delivery can also take place before the option expires if a corresponding exercise right is used.
The most important details for trading VSTOXX options:
- TWS abbreviation: V2TX
- Future options (physical delivery!)
- Stock exchange: EUREX
- Multiplier 100
- Currency: Euro
- Trading hours: 09:00 - 17:30 (CET)
The "Eurex Core" package is required for the market data of futures options:
In principle, all trading strategies developed for VIX options can also be applied to VSTOXX options. However, traders should note that VSTOXX options are not index options and therefore physical delivery of the futures can take place - both at the end of the term and during the remaining term. Anyone involved in trading volatility products should include this aspect in their risk management.
Conclusion: Are VSTOXX options suitable for every investor?
VSTOXX options offer an interesting opportunity to make targeted bets on the volatility of the European stock market or to hedge a portfolio against market fluctuations. They are particularly suitable for experienced investors who are familiar with how volatility products work and have a solid risk management system.
While buying VSTOXX calls can be an effective hedge against strong market fluctuations, writer strategies offer the chance of regular premium income - albeit with the risk of sudden increases in volatility. It should also be noted that VSTOXX options are always based on futures and can be physically tendered.
For investors who already work with options strategies and actively trade the European market, VSTOXX options can be a valuable addition. However, those who are just becoming familiar with volatility trading should familiarize themselves intensively with the special features of these instruments before taking their first positions.
