Diving Into A Long Dated VSTOXX Ratio Spread

Weekend Review For Week Of September 30, 2024 - October 4, 2024

Each week I receive a summary of VSTOXX activity from Eurex. I always scan through the block trades in VSTOXX options to see if there is anything interesting. This past week, the largest VSTOXX option trade involved buying 24,000 VSTOXX Dec 15 Puts for 0.98 each and selling 12,000 VSTOXX Dec 17 Puts for 2.33 each. This results in a credit of 0.38 for each 2 x 1 spread.

As I started digging into this trade, I found it was an exiting transaction as the open interest was reduced by the size of the trade. This led me down a rabbit hole as to what the original trade was, etc. This first table is a summary of the entry transactions where a trader sold 2 Dec 15 Puts for each Dec 17 Put purchased. Most of the trades were executed at a cost, with one exception on September 11, where the trade was put on at a credit.

The net result of all these trades is long 98,000 VSTOXX Dec 15 Puts and short 49,000 Dec 17 Puts at a net cost of about 0.12 per 2 x 1 spread. Now that we determined the final position, we can dig into the exiting trades which appear below.

In addition to the trade from September 30, there was also a small exit transaction on Tuesday October 1. The net result is buying back 27,000 Dec 15 Puts and Selling 13,500 Dec 17 Puts for a net credit of just over 0.38. The original position of 98,000 x 49,000 was reduced to 71,000 x 35,500 and a profit of 0.50 per spread was realized this past week. Time will tell if the balance of this trade is profitable and of course we will be watching both the Dec 15 Puts and Dec 17 Puts to see if we can determine the outcome to this trade upon exit or expiration.

Finally, we charted both spot VSTOXX and the December VSTOXX futures daily starting just before the first trade so wee where the underlying market was when the trades were executed.

Moving on to the markets. US markets were quiet last week with the S&P 500 (SPX) and Nasdaq-100 (NDX) were up less than one percent and the Russell 2000 (RUT) down 0.54%. Stocks in Europe had a rough road with the Euro Stoxx 50 giving up 2.22%, something that pushed VSTOXX over 20 and likely contributed to the exiting transactions discussed above.

VIX rose last week, despite the SPX gain, due to the VIX calculation methodology more than an increase in perceived market risk. VIX is calculated using two SPX Friday expirations. Last week, the two expirations contributing to VIX changed from October 25 and November 1 options to November 1 and November 8. November 8 is the first Friday expiration after the US election. As of Friday October 4, the at-the-money SPX straddle expiring on November 1 was pricing implied volatility around 14.00% while the November 8 ATM straddle implied volatility is about 16.35%.

VIX related ETPs followed the VIX lead with the long funds putting up solid returns and the short funds coming under a bit of pressure.

The rise in VSTOXX was a function of actual market concerns and not due to a calendar impact as VSTOXX is calculated using monthly option contracts.

There is a contrast in daily index option performance last week between the US and Europe as the relatively quiet week in the US was welcomed by option sellers and the more volatile week in Europe.

Starting with SPX, sellers went four for five with the sole losing day falling on Tuesday. Note the pricing on Friday, coinciding with the Non-Farm Payroll report at 0.97% of the index. This was slightly higher than the price change of +0.90%.

NDX straddle sellers went three for five, with the three winning days realizing more than 100 points. Friday was a loser, but only due to the market moving six basis points more than the straddle pricing.

In the RUT market, Tuesday was the only outlier move. Also, RUT pricing on Friday was very close to the subsequent move on the employment report.

Market conditions were different in Europe and Euro Stoxx 50 straddle sellers suffered with losing days three of five days and a big loss on Monday.

Finally, DAX straddle sellers fared better than their Euro Stoxx 50 counterpart looking more like the US markets.