How Lucrative VIX Trades May Be
The VIX volatility index of the S&P 500 stock market gauge is a strange instrument. Sometimes very volatile, sometimes more stable, but it is always returning to the mean with time. The futures prices of the index are investable and in a large proportion of the trades, moving in contango. That provides a high yield for short-sellers. At least until the next crash wipes out most short positions.
- Read more about VIX short trades: VIX ETF – How To Make 10 Percent Monthly, Or Die.
Is the VIX index the only instrument to earn with volatility shorts? In Europe, the VSTOXX index plays a similar role, representing the volatility of the Euro Stoxx 50 blue-chip index. Global stock markets often move in tandem, so do the VIX and the VSTOXX, too:
By the chart, the VSTOXX index futures were clearly higher than the VIX futures in 2016-2017. But in the last couple of years, the difference was much lower. So the real question is, do we find a nice contango in the VSTOXX futures, just like in the case of the VIX futures? Are VSTOXX shorts also a cash machine?
Are VSTOXX Shorts Also a Promising Trade?
As you see on the following two charts, the VSTOXX futures are also in a contango state these days.
But the first contango (the difference of the nearest two settlements) is a little lower than in the case of the VIX. On November 12, VIX contango reached 15.4 percent, VSTOXX contango, “only” 11.7 percent. (Which is still huge compared with other products, indexes, or commodity futures.)
So, the European index also offers a nice return. Shorting VSTOXX by the same contango all the year would mean an astonishing 277 percent return. At least in theory and with compound interests. (Calculation: 1,117^12-1). But this is only a snapshot of one day. How was the big picture?
The Returns of Two Volatility Short Trades
Were VIX and VSTOXX short trade results similar? In the last 12 months, not really. For example, look at the price of two volatility shorting products (factor certificates of the Société Générale investment banking branch, earlier, Commerzbank):
By the chart, the VSTOXX short was a far less productive business in the last 18 months – with a 19 percent return, compared with 273 percent of the VIX short. So why do we see such a big difference?
VSTOXX Shorts Affected by Lower Contango
This phenomenon’s explication is that the VSTOXX contango was “only” around five percent monthly in the last 8-10 months. But the average value of VIX contango in the previous months has been around ten percent. (Look at the horizontal dark blue lines on charts 5 and 6.)
Due to the compound interest rate effect, a five percent monthly yield grows to 35 percent in six months. While by 10 percent, the result reaches 77 percent. (The outcome of the trades in practice is much more complicated. The practical returns of certificates usually are much lower because of the expenses, portfolio rebalancing, rollover expenditures, and other losses.)
Are Fees Also Important?
There are significant differences in the fees the issuer of the certificates is charging. The Reduction in Yield indicator (RIY) shows us what impact the total costs will have on the investment return. (RIY: “Auswirkung auf die Rendite” in German.) By the official KIID documents:
- VSTOXX Short (DECU0AF4) RIY: 4.80%
- VIX Short (DECU0AF6) RIY: 1.16%
You pay this fee, at least, in some possible scenarios. But that doesn’t explain most of the difference in the performance of the products.
How Can You Invest in VSTOXX Short Products?
So, VSTOXX shorting doesn’t seem very attractive today, but I will closely watch the contango state. In addition, some investors with experience in volatility shorting may want to diversify their portfolio with a different product than VIX.
Volatility ETF– and ETN-products are scarce since many were knocked out in spring 2020 in the coronavirus crash. (And others, in February 2018.) So you had much more options before.
1. US VSTOXX ETFs
Some years before, two VSTOXX short and long ETNs (exchange-traded notes) started in the United States.
- EVIX ETN – VelocityShares 1X Long VSTOXX Futures ETN
- EXIV ETN – VelocityShares 1X Daily Inverse VSTOXX Futures ETN
But both ceased trading on March 24, 2020.
2. European VSTOXX ETFs
In Europe, the Commerzbank Group started volatility exchange-traded products regularly before the last crash. (Today, this business is part of the Societe Generale group.) But I couldn’t find any more of these today.
3. VSTOXX Certificates in Frankfurt
Various issuers have dozens of long and short VSTOXX certificates on the Frankfurter Boerse (German Stock Exchange). Most of them are “factor certificates” (the “factor” here indicates steady leverage, mostly between 1x and 4x). The market seems to boom because many of the products started in the last couple of weeks. (I assume these investments are not available for American or Canadian private investors.)
4. Futures Or Options
You can also get exposure to VSTOXX shorts using options, futures, CFDs. But these products also bear significant risk, especially by margin trading. As a result, you may lose more than you invested. Again, ask your brokerage firm or investment advisor.
Warning, Extreme Risks!
As I wrote in my post about the VIX short trades, “Death May Come for Them Every Few Years,” huge stock market collapses cause volatility shorts to turn into a disaster. A few products survived the March 2020 catastrophe.
Some data series doesn’t contain the value of the certificates mentioned above for the period before April 2020. It may be no coincidence because these products almost died out in the crash. They lost approximately 80-95 percent of its value. But I can show you Boerse Frankfurt’s charts to better describe the high risks related to volatility shorting. (Source1, Source2.)
By volatility shorting, you may want to take some profits periodically to prevent the loss of all your money.
Recommended related readings:
(External link: The official page of the VSTOXX index.)