Think the market is too complacent about this weekend's election in France? Worried that the euro area is going to crumble under the weight of Italy's struggles? Convinced that Greece, Portugal or Spain are just one more kicked can away from a disaster?
As of tomorrow, investors in the U.S. will have another way to translate these ideas into actionable trades with tomorrow's launch of two new exchange-traded notes (ETNs) - EVIX (long euro zone volatility) and EXIV (inverse euro zone volatility) - from VelocityShares and UBS that put a European face on existing U.S. VIX-based products such as VIIX and perennial favorite XIV.
Based on the VSTOXX, the VIX-like volatility index for the EURO STOXX 50 Index of 50 blue-chip stocks from 11 euro zone countries, EVIX and EXIV should be familiar to those who are knowledgeable about VXX and VIIX on the long volatility side as well as XIV and SVXY on the short volatility side. EVIX and EXIV are based on VSTOXX futures and have a target maturity of 30 days - a maturity that is maintained by rolling a portion of the portfolio each day and therefore subjecting both products to the vagaries of contango and backwardation. In the event these are terms you are not familiar with, I strongly recommend that you click on the links above and educate yourself. Believe it or not, this is the ninth year I have been talking about the VIX futures term structure, negative roll yield, contango and backwardation. (Those who have been paying attention since the early days of VXX and VXZ have no doubt profited mightily from this knowledge.)
The beauty of EVIX and EXIV is that these products create so much flexibility for investors who maintain a global, cross-asset class view of volatility. In the run-up to the first round of the French election, for example, VSTOXX spiked dramatically and pushed the VSTOXX:VIX ratio below 1.00, creating some interesting arbitrage opportunities and/or pairs trades in the process. Now investors can trade euro zone volatility against U.S. volatility, use targeted hedges for risk that is specific to the euro zone or speculate more easily about the direction of volatility in the euro zone.
I encourage everyone to study the EVIX and EXIV prospectus closely.
This is a huge development in the volatility space and if options on EVIX and EXIV follow later this week, as expected, the volatility trading landscape will be much richer and more diverse.
While I'm at it, why are there no options on XIV? This is such a popular high-beta product that it deserves options so traders can express a broader range of opinions on volatility. Readers, it never hurts to nudge the CBOE on these issues. An outpouring of popular sentiment can make a difference.
As the risk of charging off into full rant mode, I feel compelled to say that I hope volatility investors know a good thing when they see it. It is a shame that VXST futures did not attract enough attention to hang around and that the REX VolMAXX Long VIX Weekly Futures Strategy ETF (NYSEMKT:VMAX) and REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (VMIN) are not trading with higher volumes. One of the best volatility products ever created, the VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV), nearly died of neglect before investors finally paid it some attention.
As I see it, EVIX and EXIV as well as VMAX and VMIN are test cases for the future of the breadth of volatility products. If you would like a diverse tapestry of volatility products in the future, it would not hurt to "buy local" volatility ETPs rather than sticking to the handful of already successful products. If you don't vote with your feet, you had better be happy playing in a small and rather limited sandbox. I am fond of saying, "In volatility, there is opportunity!" - but that opportunity is a function of the richness of the various volatility product platforms.
Last but not least, I know Eurozone and eurozone are the preferred spellings, but I am sticking to the two-word "euro zone" with as much stubbornness as I can muster. What can I say, I am short convention.