Saturday Review for March 5, 2022

The Cboe Volatility Index (VIX) and Euro Stoxx 50 Volatility Index (VSTOXX) have both received a lot of attention lately. This is due to both remaining at elevated levels responding to increased uncertainty regarding both economic and geopolitical events we are all dealing with. However, over the course of last week, VSTOXX progressively widened the spread versus VIX. The chart below covers the front month (March) VIX and VSTOXX future prices when both markets were open last week.

First, as an explanation, I decided to use the front month futures for this example since that’s how most traders would take advantage of the spread between these two markets. Early on Monday the VSTOXX contract was 1.35 higher than VIX, as of the end of the week this spread widened to 8.40. Many market participants may attribute this to the ongoing war in Ukraine being on Europe’s doorstep. However, historically VSTOXX has risen into elections in France that occur every five years. That event is approaching with the first round occurring on Sunday April 10.

The March VSTOXX performance last week was more about the future catching up with the index than following the index higher. The diagram below shows the week over week changes for the VSTOXX term structure.

Note the March contract shifted from a large discount to a slight premium relative to spot. Again, I’ll cite the pending election as a reason for this. This contract will expire before the election, while VSTOXX is likely at elevated levels, regardless of what transpires in Ukraine.

Trading wise, I picked up on a calendar spread late Thursday expecting the April VSTOXX future to close the gap with March. Specifically there was a buyer of the April contract at 32.25 who sold the March contract at 35.05.

It was a tough week for US stocks last week as the major indices were down between 1.27% (S&P 500) and 2.48% (Nasdaq-100). All volatility indices moved up in response to this price action.

The VIX term structure shifted higher in a fairly parallel fashion with March practically matching the move higher in spot VIX.

The Nasdaq-100 (NDX) is having a tough year and as of Friday NDX is off a tad shy of 15% year to date. On Thursday, an execution indicates a trader thinks there is more downside to go. With NDX at 13853 someone purchased 100 of the NDX Dec 16^th 12,500 Puts for 869.20. The payoff diagram highlights the year to date numbers that coincide with the significant levels associated with this trade.

The price levels highlighted do not represent the move from where the market was when the trade was executed which is my normal method of showing these things. Break-even involves a drop of 28.7% and the strike price is down 23.4%. Of course, if the move occurs sooner that December we can also tack on an increase in implied volatility which should put premiums to higher levels along with the price change.