VSTOXX Rises To Highest Premium To VIX In Over Two Years Saturday Review For Week Of June 10, 2024 - June 17, 2024 RUSSELL RHOADS, PHD, CFA JUN 16 Last week was a tale of two markets as large cap US stocks continued to move higher while US small caps and European stocks got smacked down. The divergence with European stocks is due to concerns around recent election results. Both VSTOXX and VIX were higher on the week, but the VSTOXX move left VIX in the dust. The VIX term structure shifted higher apart from the June contract which expires Tuesday morning this week due to the market holiday on Wednesday. VIX ETPs acted as expected with SVIX losing 0.40, which came on the heels of the 21st and 22nd new all-time highs reached on Wednesday and Thursday. The winner on the week was VXZ which offers long exposure to the 4th through 7th month VIX futures contracts. VSTOXX was higher by almost 50% for the biggest one week move since March 2022. The term-structure for the summer is in backwardation. Beyond August, the shape reflects uncertainty associated with the US presidential election. The headline this week relates to the relationship between VSTOXX and VIX. Our method of tracking the two uses the front month future price for each at 10:00 am each day. We chose this method for two reasons. First, use the index closing prices each day ignores afternoon trading in the US which occurs after European markets are closed. The other reason is that you cannot trade spot VSTOXX or VIX and if we are comparing those markets, we want to use actionable data. The chart below shows the spread between VSTOXX and VIX starting with January 2022 through this past Friday. Friday’s spike resulted in the June VSTOXX future priced at over a six-point premium to June. This was the widest spread since the first quarter of 2022. Not only was there a wide divergence in index performance last week, but there was also a divergence in short term index option action last week. S&P 500 (SPX) one-day at-the-money (ATM) straddles overpriced the subsequent move every trading day last week. Note on the table below the elevated pricing for Wednesday’s straddle in anticipation of extra volatility associated with CPI and FOMC reports coming out that day. Nasdaq-100 (NDX) straddle pricing was 3 for 5 missing the moves on Tuesday and Wednesday. For months, small cap stocks have had a very difficult time keeping pace with large caps and last week was another instance of Russell 2000 (RUT) underperformance. RUT straddle sellers went four for five, with Friday’s big drop for RUT almost twice the straddle pricing. European straddle sellers had the most difficult week since daily Euro Stoxx 50 options were introduced in late August. We do not recall a week where the straddle underpriced all five days. Finally, with one exception (Monday) DAX straddle pricing followed the Euro Stoxx 50’s lead in underpricing the following day’s move.