Volatility derivatives at Eurex Exchange. November 2014

Transcription

1 Volatility derivatives at Eurex Exchange November 2014

2 Agenda What volatility derivatives can do for you Eurex Exchange s volatility derivatives VSTOXX Advanced Services Liquidity and volume Trading strategies Market making programs Further information & contact details 2

3 Volatility diversifies portfolios Benefits of Volatility Derivatives in Portfolio Management EDHEC Risk Institute May 2012 Correlations converge to 1 in turbulent markets, and traditional diversification fails when needed most. Negative correlation between implied volatility and equity portfolio is robust at on a 10 year basis. Long volatility exposure is strongest in market downturns, exactly when it s needed most, and results in a substantial improvement of portfolio risk-adjusted performance. Even a modest allocation to volatility derivatives allows an investor to generate portfolios with more attractive downside risk properties. 3

4 Negative correlation and mean reversion EURO STOXX 50 Index versus VSTOXX When volatility is high, it can stay high or trend back down to a long-term mean. 4

5 What volatility derivatives can do for you Diversify and hedge your equity and credit portfolios. Equity funds are short volatility --- Equity falls, volatility rises. Equity put positions can be substituted by a position in volatility. Use volatility as a tail-risk hedge. Benchmark strategies require frequent rebalancing, driving costs up. Negative correlation of VSTOXX to EURO STOXX 50 offsets rebalancing costs. Generate returns Trade on volatility levels. Trade spreads between volatility indexes. Trade on mean reverting nature of volatility. Dispersion trading. 5

7 EURO STOXX 50 volatility The VSTOXX index VSTOXX Index is based on market prices of EURO STOXX 50 Index Options. The VSTOXX index does NOT measure implied volatilities of ATM options, but the implied variance across all options of given time to expiry. The main index VSTOXX is designed as a rolling index at a fixed 30 days to expiry through linear interpolation of the two nearest of the eight available sub-indexes. The sub-indexes represent the eight expiry months with a maximum of two years and are calculated every five seconds. EURO STOXX 50 Option Front month expiry 7 days VSTOXX 30 Day Main Index EURO STOXX 50 Option 2nd month expiry 37 days Sub-index 1 Sub-index I n t e r p o l a t i o n 7

8 Weight Variance Exposure Variance Exposure Variance Exposure Volatility products at Eurex Exchange August 2014 Trading and hedging variance: Implied volatility strike Variance exposure of one option 0,25 0,20 0,15 0,10 0, , Spot Level Exposure of a strip of options 0,30 0,25 0,20 0,15 0,10 0,05 0, Spot Level Weighted by 1/K 2 = 0,60 0,50 0,40 0,30 0,20 0,10 0, Spot Level 0,06 X 0,05 0,04 0,03 0,02 0,01 0, Spot Level The number of options one needs per strike is proportional to (1/Strike 2 ) to assure a flat variance/vega profile. Due to the (1/Strike 2 )-behavior, one needs more and more downside puts the lower the straddle strike. 8

9 EURO STOXX 50 volatility The VSTOXX index Price screens and filters Option prices that are one-sided are screened out. Only options that are quoted within the maximum spreads of 8% are eligible. Cutting the wings exclusion of option prices that are too far OTM, ensures that prices used do not fall short of a minimum value of 0.5 index points. 9

10 Why the VSTOXX? European debt crisis has resulted in repeated mini spikes in VSTOXX. Higher negative correlation to the EURO STOXX 50 (ca ). Higher realized volatility of financials in VSTOXX (ca. 35%). Lower roll cost of ca. 1 volatility point per month, as VSTOXX futures term structure is less impacted by structural rolling of ETNs. Exploit relative value opportunities between the VSTOXX and the VIX. 10

11 Product specifications Symbol OVS FVS Product Name VSTOXX Options VSTOXX Mini Futures Underlying Contract Value The VSTOXX Index, a market estimate of expected volatility that is calculated every 5 seconds by using real-time EURO STOXX 50 option bid/ask quotes. EUR 100 per index point of the underlying Price Quotation and Minimum Price Change In points with two decimal places. The Minimum Price Change is 0.05 points (equivalent to a value of EUR 5). Contract Months Exercise Price Intervals Exercise Staggered by Volatility Index Level: = < 20-1 Index Point > 20 and =< Index Points > 50-5 Index Points 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 Settlement Daily Settlement Price Last Trading Day and Final Settlement Day Final Settlement Price Cash settlement, payable on the first exchange day following the Final Settlement Day. Established by Eurex, determined through a binomial pricing model. Determined during the closing auction of the respective futures contract. 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. Average of the VSTOXX values on the Last Trading Day between 11:30 and 12:00 CET. Block Trade Size 500 Contracts 1,000 Contracts Vendor Codes Bloomberg: V2X INDEX OMON Reuters: 0#FVS+ Bloomberg: FVSA INDEX Reuters: 0#FVS: 11

13 VSTOXX Advanced Services Implied volatility derivatives are not just another index product. Index construction and 2nd degree derivatives pricing require greater due diligence from end-users looking to trade in the volatility space. To facilitate product approval processes and to streamline academic studies and practical trading guides, Eurex has created a range of VSTOXX tutorials and analytical tools for researchers, traders and investors: Develop your own data history of EURO STOXX 50 options and VSTOXX Recalculate the VSTOXX sub-indexes and the main 30 day index Value derivatives available on the VSTOXX index Back-testing database for optimization of EURO STOXX 50 portfolios with VSTOXX futures and options. 13

14 Tutorial Analyzing historical VSTOXX data Creation of a Database Generate a database containing historical data of the EURO STOXX 50 and VSTOXX. Use an external source (e.g. a Web site) and prepare the data within Python. Data Analysis We use the data to learn more about the correlation between EURO STOXX 50 and VSTOXX. There is a number of empirical studies that show that the volatility indexes are in general strongly negatively correlated with stock indexes, and we can now verify these results. 14

15 Tutorial Calculation of VSTOXX In this section we demystify the index formula: by calculating the VSTOXX Index and its sub-indexes from scratch. Collect EURO STOXX 50 options data and required money market rates Compute forward prices Calculate strikes distances Set at and out of the money strikes and collate this to: Calculate VSTOXX sub-indexes and determine main 30 day VSTOXX via interpolation 15

16 Tutorial GL 96 for VSTOXX options Andreas Gruenbichler and Francis A. Longstaff published in 1996 (GL96) a semi-analytical ( closed ) pricing formula for European volatility call options. They model volatility directly and make the assumption that volatility follows a square-root diffusion process. This section implements their formula as well as a Monte Carlo simulation for their financial model. The red dots are the values from the Monte Carlo simulation which are quite accurate. This level of accuracy is reached with 50 time steps and 50,000 simulation paths. 16

17 Back-testing with VSTOXX There is ample academic research that shows that adding volatility products like VSTOXX to an equity portfolio improves risk return profiles and trading results. The Back-testing Application EURO STOXX 50 plus VSTOXX: Back-test for a portfolio of direct investments in both the equity and volatility index. EURO STOXX 50 plus VSTOXX Futures: Back-test for a portfolio of direct investments in both the equity index and volatility index futures. Four Assets: Back-test for a portfolio of up to four assets; choose e.g. DAX, EURO STOXX 50, VSTOXX, VSTOXX Futures or VSTOXX Options and choose your weightings, position rolling & portfolio rebalancing rules as well as transaction costs. 17

18 Back-testing with VSTOXX index 18

19 Back-testing with VSTOXX Index 19

21 VSTOXX volume and open interest VSTOXX Futures VSTOXX Options 2014 daily volume increased to 27,000, up over 30% over 2013 volumes daily average volume: 12,000 contracts. 21

22 Options Futures Volatility products at Eurex Exchange August 2014 Liquidity overview for volatility derivatives VSTOXX Futures are quoted up B/O spread ~ 0.10 near month expiries, ~ 0.2 for back months VSTOXX Options are quoted across all 8 expiry months. Trades in the dealer market are commonly done in sizes of 1,000-5,000 contracts. 22

24 VSTOXX term structure VSTOXX term structure was in contango 72% of the time since When volatility rises, the term structure flattens, or goes into backwardation. 24

25 VSTOXX calendar spreads In September 2013, VSTOXX was at 18, about 3 points under its long term mean. When the VSTOXX Futures term structure is in contango, going long comes at a cost of about 1 volatility point per month, making the timing of long volatility trades crucial. In 2013, VSTOXX expiry 3 versus 6 was -1,5, with a long term average of -1,0 since Long positioning via the 3/6 VSTOXX Futures calendar spread offered opportunity. VSTOXX 20. Sep 2013 VSTOXX 8. Oct 2013 FVS3 Index 19,45 18,95 FVS6 Index 22,35 20,25 FVS 3 vs 6-2,9-1,3 25

26 Integrated calendar spread trading Prior to March 2013, Eurex offered 3 calendar spread combinations Transaction costs for spread trading are now cut in half and more. Outrights Spreads 50 of the 150 lots on the Jul12 Offer are from implied pricing 26

27 Inter product spread trading in volatility derivatives 9 April 2014: VSTOXX vs. VIX Futures term structure 6 May 2014: VSTOXX vs. VIX Futures term structure Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 VSTOXX VIX VSTOXX VIX On 9 April 2014, near month VSTOXX futures were trading 3 index points over VIX futures. The term structure of the VSTOXX and VIX were nearly parallel. Short VIX futures term structure roll-down strategies combined with long VSTOXX Futures offered returns on a short-term basis. Risk is reduced and managed with a hedge in VSTOXX futures, but the roll down trade is not risk free as the VIX term structure can go flat, or rise independently of VSTOXX as observed in the revisited fiscal cliff woes in October

28 VIX/VSTOXX spread trading the term structure roll down Sell VIX 2-month future, buy VSTOXX 2-month future. Keep the position until expiry. Re-enter position every month. Date VIX VSTOXX 0-month 1-month 2-month 0-month 1-month 2-month P&L VIX P&L VSTOXX P&L combined ,69 15,5 17,1 16,85 17,65 18,65 4,46 1,53 5, ,07 14,75 15, ,7 19,7 0,39 2,46 2, ,64 14,5 15,95 20,18 19,8 20,5 2,78-3,95-1, ,46 16,45 16,75 22, ,3-0,47-1,85-2, ,17 15,3 16,4 16,55 18,45 19,7 1,97 0,14 2, ,22 17,7 18,35 20,45 21,2 21,9 1,93-1,52 0, ,43 15,6 16,95 19,84 20,55 21,55 2,18-2,91-0, ,42 16,1 16,95 20,38 21,1 21,55-0,26-2,27-2, ,77 14,7 15,9 18,64 19,5 20,4 1,75-5,14-3, ,21 15,5 16,53 19,28 19,4 19,05 1,98-1,94 0, , ,15 15,26 16,4 19,1 3,35-2,46 0, ,55 15,6 16,3 17,11 18,1 19,1 0,93-1,14-0, ,8 14,75 15,5 16,64 17,4 18,2-0,07 4,65 4, ,37 15,78 16,41 17,96 17,95 18,05 0,54 0,14 0, ,57 16,23 16,77 22,85 19,15 19,85 2,67-4,72-2, ,87 16,34 16,78 18,19 19,05 19,45 5,04-6,19-1, ,1 15,03 15,64 15,13 17,35 18,15 4,61-3,27 1, ,74 12,7 13,7 13,26 15,5 16,8 1,55 0,28 1, ,03 12,7 13,6 14,88 15,8 16,55 0,57-0,19 0, ,15 13,5 14,2 17,08 17,05 17,45-1,72 4,78 3, ,03 14,25 14,95 16,36 17,25 17, ,92 18,1 18,05 22,23 20,15 18,5 Total 100,65-68,61 32, ,05 10,41 14, ,42-55,45 6, ,99-19,05 1, ,19-4,52 8,67 Expectations are met: Both VIX and VSTOXX futures are in contango. VIX futures roll down more than VSTOXX due to the steeper VIX term structure, and a profit was made. VSTOXX depreciated from a higher level, and losses were not compensated by VIX roll down. 28

29 Systematic selling of VSTOXX puts (tiered approach) Motivation Expect long term volatility increase Avoid higher call prices Protect against VSTOXX mean reversion The trade Systematically sell OTM front month VSTOXX puts according to the table, hold position until expiry. VSTOXX near month future level Sell Put Strike with distance to future < > Result Strategy profitable every month from April 2011 to June Total profit from 2011: 6.1 points, Avg points per month. Roll-down of 1,000 options results in net profit of 1000*100*6.1 = 610,000. HOWEVER, the massive decline of the VSTOXX in September 2012 has negatively impacted the strategy, accentuating the importance of the overall volatility environment in the execution of the systematic short put selling. 29

31 New VSTOXX Futures Market-Making scheme Minimum contract size Scheme 1: 200 contracts Scheme 2: 250 contracts Scheme 1 Contract months volatility index points for bids up to 20 index points. 1 percent for bids greater than 20. Maximum spread Required coverage Contract months volatility index points for bids up to 20 index points. 2 percent for bids greater than 20. Scheme 2 Contract months volatility index points for bids up to 20 index points. 0.5 percent for bids greater than 20. Contract months volatility index points for bids up to 20 index points percent for bids greater than per cent of the total trading period on a monthly average. Maturity range All eight maturities must be covered. Incentive For scheme 1 and 2: 100 per cent free rebate for trades on the M-account from 1 September 2014 until 31 December 2014, for fulfilling monthly obligations. 31

32 Market-Making volatility options Minimum Contract Size 25 contracts Maximum Spread* Bid up to 2 max Spread 0.40 points Bids from 2 to per cent of bid price i.e. Option bid = 4.00, thus a spread 80 bps Bid > 20 max Spread 4 points Required Coverage Expiry Range 70 per cent of the total trading period on a monthly average for calls and puts in five out of nine strikes around the current index level. Asymmetric quotation is allowed. Four of eight expirations have to be covered Incentive 100 per cent free rebate for trades on M-account until December 31, 2014, for fulfilling monthly obligations. Eurex will also grant a revenue sharing and distribute 50 per cent of the net trading fee among the top 3 performing Market Makers on a monthly basis. The kickback is determined as a share of the trading volume of the three Market Makers. 32

33 Market-Makers Company Contact Person Phone Morgan Stanley VSTOXX Futures Gabriel Manceau Societe Generale VSTOXX Options Laurent van Hollemeersch Optiver Holding B.V VSTOXX Futures & Options Flow Traders VSTOXX Futures Maanit Chhabra Pascal Teekens DRW Investments VSTOXX Options Vincent Kory

34 Agenda What volatility derivatives can do for you Eurex volatility products VSTOXX Advanced Services Liquidity and volume Trading strategies Market making programs Further information & contact details 34

35 Further information Information on Product page: Factsheet: STOXX strategy index guide: VSTOXX Advanced Services: 35

36 Contact us Sales Frankfurt Sales Paris Sales Zurich France Schuster Eurex Frankfurt AG Neue Börsenstraße Frankfurt / Main Germany P: +49 (0) F: +49 (0) france.schuster@eurexchange.com Paul Beck Deutsche Börse AG Representative Office France 17, rue de Surène Paris France P: +33 (0) F: +33 (0) paul.beck@eurexchange.com Markus-Alexander Flesch Eurex Zürich AG Loewenstrasse Zürich Switzerland P:+41 -(0) F:+41 (0) markus-alexander.flesch@eurexchange.com Sales UK Sales Americas Sales Asia & Middle East Stuart Heath Deutsche Börse AG UK Representative Office One Canada Square, Canary Wharf London, E14 5DR United Kingdom P: +44 (0) F: +44 (0) stuart.heath@eurexchange.com Vassilis Vergotis Eurex 233 South Wacker Drive - Suite 2450 Chicago, IL USA P: F: vassilis.vergotis@eurexchange.com Roland Schwinn Eurex Frankfurt AG 50 Raffles Place No Singapore Land Tower Singapore P: F: roland.schwinn@eurexchange.com 36

37 Eurex 2013 Deutsche Börse AG (DBAG), Clearstream Banking AG (Clearstream), Eurex Frankfurt AG, Eurex Clearing AG (Eurex Clearing) as well as Eurex Bonds GmbH (Eurex Bonds) and Eurex Repo GmbH (Eurex Repo) are corporate entities and are registered under German law. Eurex Zürich AG is a corporate entity and is registered under Swiss law. Clearstream Banking S.A. is a corporate entity and is registered under Luxembourg law. U.S. Exchange Holdings, Inc. and International Securities Exchange Holdings, Inc. (ISE) are corporate entities and are registered under U.S. American law. Eurex Frankfurt AG (Eurex) is the administrating and operating institution of Eurex Deutschland. Eurex Deutschland and Eurex Zürich AG are in the following referred to as the Eurex Exchanges. All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof (other than certain trademarks and service marks listed below) are owned by DBAG and its affiliates and subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication DBAG, Clearstream, Eurex, Eurex Clearing, Eurex Bonds, Eurex Repo as well as the Eurex Exchanges and their respective servants and agents (a) do not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication. This publication is published for information purposes only and shall not constitute investment advice respectively does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This publication is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only. Eurex and Eurex Clearing offer services directly to members of the Eurex exchanges respectively to clearing members of Eurex Clearing. Those who desire to trade any products available on the Eurex market or who desire to offer and sell any such products to others or who desire to possess a clearing license of Eurex Clearing in order to participate in the clearing process provided by Eurex Clearing, should consider legal and regulatory requirements of those jurisdictions relevant to them, as well as the risks associated with such products, before doing so. Eurex derivatives are currently not available for offer, sale or trading in the United States or by United States persons (other than EURO STOXX 50 Index Futures, EURO STOXX 50 ex Financials Index Futures, EURO STOXX Select Dividend 30 Index Futures, EURO STOXX Index Futures, EURO STOXX Large/Mid/Small Index Futures, STOXX Europe 50 Index Futures, STOXX Europe 600 Index Futures, STOXX Europe 600 Banks/Industrial Goods & Services/Insurance/Media/Travel & Leisure/Utilities Futures, STOXX Europe Large/Mid/Small 200 Index Futures, Dow Jones Global Titans 50 IndexSM Futures (EUR & USD), DAX /MDAX /TecDAX Futures, SMIM Futures, SLI Swiss Leader Index Futures and VSTOXX Mini Futures as well as Eurex inflation/commodity/weather/property and interest rate derivatives). 37