The volatility trading world will expand to two new markets this summer as Euronext plans to offer derivatives based two volatility indexes. Plans call for futures trading to commence based on the AEX Volatility Index (VAEX) and the CAC 40 Volatility Index (VCAC) in the next few weeks with options to follow sometime during the third quarter of this year.
It has been a while since I checked in on either the Amsterdam based VAEX or Paris based VCAC so I got to running some numbers and creating some charts. Both VAEX and VCAC data is available going back to the first day of 2000 so there is a lot of history to work with. First, here is a weekly chart of VAEX versus the performance of the AEX Index from January 2000 through this past week (June 5th).
If we didn’t have the labels and scales on this chart you might guess that this AEX versus VAEX picture was of the S&P 500 versus VIX. My experience is that broad based equity markets tend to have a defined inverse relationship with the implied volatility of options on that market. The VAEX versus AEX market tends to follow that rule. The correlation between AEX and VAEX for this time period is -0.67 which is very close to the S&P 500 – VIX correlation of -.73 over the same period.
The same relationship holds true for the CAC versus VCAC and can be seen in the chart below.
The CAC – VCAC correlation is -0.68, just a tad lower than the AEX – VAEX relationship. The point, which should be music to trader’s ears, is that both VAEX and VCAC behave very similarly to how VIX reacts to changes in the S&P 500. Strategies that have been proven to be effective in VIX derivatives will most likely translate to these two new volatility markets.
Since extended trading hours for VIX futures was launched last year, we have seen traders in other parts of the world combine positions in their local volatility market with a position in VIX. The correlations between VIX and both VAEX and VCAC lead me to believe we will see this sort of cross trading in these markets as well. I put together a chart using weekly closing prices from the beginning of 2014 (2000 to present was a bit too busy) showing VIX, VCAC, and VAEX price action.
Using the weekly data from January 2000 to this past Friday, the correlation between VIX and VAEX has been +0.74 while the relationship between VIX and VCAC is +0.71. Finally, VAEX and VCAC have a correlation of +0.84. These types of correlations mean that the markets diverge enough to take a short position in one and long position in the other when a trader thinks they have gotten a little too much out of line.
With the addition of VAEX and VCAC the listed tradable volatility space continues to expand. I’m looking forward to picking up on how traders take advantage of the new opportunities offered in these new markets and plan on sharing what I see in this space later this summer.