Volatility has become an investable asset class and increasingly one that is present in professional portfolios. Through volatility investments, investors and traders can implement their views on market swings and hedge equity holdings. Indices have played a vital role in this development, offering transparent and rules-based methodologies, and underlying products such as listed derivatives.
Since 2005, the VSTOXX® (EURO STOXX 50® Volatility index) has measured expectations for volatility in the EURO STOXX 50®, the Eurozone’s flagship equity benchmark. As such, it has become the essential gauge of the region’s “market fear.” Almost 18 million futures and options on the VSTOXX trade on Eurex each year.1
VDAX®, meanwhile, measures the volatility of the German equity market based on options on the benchmark DAX®.
VSTOXX methodology
The VSTOXX recreates, at each calculation interval, a portfolio of out-of-the-money options that represents the implied variance of the EURO STOXX 50. The square root of this is the implied volatility, or the market’s expectations of future volatility. VSTOXX covers all EURO STOXX 50 options listed on Eurex with a given time to expiration and that meet certain pricing criteria.
With the VSTOXX indices, investors can anticipate volatility in European markets at different times in the future. Although the main VSTOXX 30 days index is the most popular – and is usually referred to as “the VSTOXX” – eleven other indices are calculated, covering fixed expiries up to 360 days in increments of 30 days.
Volatility strategies
An extensive menu of STOXX indices also gives investors access to systematic exposure to volatility- and derivatives-based strategies. These indices include:
Volatility use cases
Market gauge
Directional views
Volatility selling
Dispersion trading
Spread trading
Hedging
Trading trigger
Risk control
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VSTOXX daily settlement price window expanded to enhance volatility trading
The so-called time-weighted average price (TWAP) period employed in the calculation of the index’s daily settlement level will expand thismonth. The change should help increase liquidity in derivatives tied to VSTOXX.
August market turmoil highlights benefit of dynamic volatility allocation
The EURO STOXX 50 Volatility-Balanced index, which combines an investment in stocks with a dynamic allocation to volatility futures, jumped 8% on August 5 amid a broad equities sell-off. The volatility strategy has returned an average of 3.2 percentage points a year above its benchmark since 2006 as tail-risk protection paid off.
Video: Upcoming elections and market volatility. What is the VSTOXX index telling us?
Asset TV caught up with Hamish Seegopaul, Global Head of Index Product Innovation at STOXX; and Zubin Ramdarshan, Head of Equity & Index Product Design at Eurex, to understand just how VSTOXX and its derivatives work. They were joined by Yangyang Hou, Executive Director for Global Quantitative and Derivatives Strategy at JP Morgan, who explained how investors and traders are using VSTOXX futures and options in a market with plenty of sources of potential risk.
1 Volume data corresponds to 2023.