Indexed volatility strategies continue to gain ground among professional investors, while a growing range of products is giving retail investors access to the space as well.
Speaking at the recent Eurex Focus Day on Volatility, Tom Shuttlewood, Head of Strategy and Digital Asset Indices within Product Development at STOXX, presented on the current state of volatility indices and related strategies. STOXX is Europe’s leading index provider in this segment, as manager of the VSTOXX® (EURO STOXX 50® Volatility).
Tom’s presentation focused on the potential expansion of the volatility indices suite, an area of much interest as the possibilities and adoption of volatility as an asset class grow.
Enhanced expiry granularity
STOXX’s team has evaluated the feasibility of expanding innovation in volatility indices, Tom said, and any plans are currently only at the exploratory stage. The two main avenues for expansion would be to grow the existing VSTOXX offering and to design new indices of this type.
The VSTOXX indices currently cover fixed term expiries from 30 to 360 days, measuring the market expectation of EURO STOXX 50® volatility over those time periods. 30-day intervals reflect the availability of only monthly option expiries when the VSTOXX indices were introduced in 2005.
The launch of weekly and daily options on the EURO STOXX 50 since then “gives us much greater flexibility in terms of index customization,” Tom said during the presentation. “We can now create VSTOXX indices calculating weekly or even daily implied volatility measurements.”
That enhanced granularity could expand traders’ ability to gauge market volatility. More significantly, it could create new opportunities for volatility trading strategies — such as hedging and directional plays — over shorter time horizons. Those opportunities could result in more complex index products, Tom added.
Expansion to other indices
A second avenue is the expansion of the VSTOXX methodology to benchmarks beyond the EURO STOXX 50.
“We need to be logical here, and think of the business case where these indices could be used,” Tom said. He explained that a prerequisite would be to consider indices with a deep and liquid options market, and where a volatility index would be “complementary” to popular underlyings for ETFs, structured products, and indices that have successful dividend derivatives. Finally, candidates would ideally be benchmarks for a broad region or sector.
Taking this into account, Tom said the main candidates would be the EURO STOXX® Banks index and the STOXX® Europe 600.
“VBANKS and V600, as we would call them, could certainly be really useful and facilitate the trading strategies that have seen such success in the VSTOXX and EURO STOXX 50,” he said.
Speaking after the presentation, Tom confirmed that STOXX is not currently working on new regional or sector volatility indices, and that there is no immediate plan to expand the VSTOXX suite, although this is something that remains a possibility. STOXX also compiles the VDAX®, which measures volatility in German stocks.
VSTOXX and last year’s settlement changes
In recent years, STOXX has worked to ensure that VSTOXX is fit for purpose and continues to meet market needs. The focus has been on enhancing, rather than expanding, the existing indices.
In September 2024, STOXX extended the time window for calculating VSTOXX ticks and determining the index’s settlement level — from 30 to 60 minutes. The settlement value is the time-weighted average price (TWAP) over that window. The aim was to improve the stability and robustness of the VSTOXX settlement calculation, reduce the risk of large price movements by incorporating a greater number of index ticks, and strengthen the index’s trading ecosystem.
“It also allowed market makers and market participants to take on greater positional risks coming into expiry,” Tom said. “For end clients, this allowed more flexibility in execution and it naturally fosters liquidity.” He added that the easing of pressure to offload positions in a limited number of ticks was a key concern raised during a market consultation.
In parallel, Eurex introduced changes to improve tradability across the VSTOXX ecosystem. These included adjusting liquidity provider schemes, and updating incentives and parameters such as quote coverage, and spread and size requirements, to deepen the order book’s liquidity.
Increased sophistication
A defining trend in the volatility space in recent years has been the rise and wide adoption of indexed volatility strategies, predominantly in risk control and volatility target indices.
“The basis here is the dynamic allocation between a risk-on — usually equity — leg and a risk-free leg, based on prevailing volatility, with a vol target which converges based on this allocation,” Tom told the audience. “Clients have been interested in indices with low volatility targets as a method of risk mitigation, given the changeable geopolitical environment.”
Such products have been popular in Europe, Tom explained, while interest has more recently emerged in the US as well.
Structured product issuers are also exploring high-volatility target strategies that use leverage to achieve index volatility levels above those of the underlying benchmark. This approach enables them to design products with more attractive payoffs and coupons for end clients, particularly in low-volatility market environments.
“The space is getting more sophisticated, with intra-day, or multiple intra-day, reallocations,” Tom said. “This is another area of research, and just another way in which volatility can be used in index strategies and in the construction of financial products.”
Volatility indices remain an area of growing demand and innovative allocation, and this latest presentation offered valuable insight into what may lie ahead.