Navigating volatility: trading European volatility markets in a year of macro events and elections

The year is still young, but we have already seen quite a lot of geopolitical turmoil. Amidst all this uncertainty, what is the outlook for Europe and what trading opportunities does it offer?Davide Silvestrini: Europe is a more complicated story than the US. J.P. Morgan has an underweight position on Europe and a neutral position on the US, which is our favorite region. However, so far this year Europe has outperformed our baseline expectations substantially.This is a trend that is developing. An equity derivatives strategy that I have been recommending to cover that upside risk is spending some premium. You can’t ignore the trend, but the chance of trouble coming down the line is very high, so it is good to have some insurance in place.As we have seen recently, tariff risk can oscillate wildly from day to day, moving from low to high and back again within a very short period of time. Unless you completely dismiss tariff, risk and take a more medium term view on the market, you can't be overly positive on Europe and European equities. That said, the market swings we have seen so far in 2025 have not made us change our volatility targets for the year, in the US or Europe.How vulnerable are investors to a rise in volatility at the moment?Vulnerability comes in many forms. Firstly, there's how exposed you are, then how hedged you are, and then how leveraged you are. How hedged you are matters to a point. This needs to be monitored in combination with the first factor, which is how long you are. So how long are investors? Retail investors do not hedge, but are institutional investors, who do, as extremely long as they were at the end of last year?The answer is no. That positioning has been retraced to some extent. Institutional investors are now participating more in European markets. They recognize that there are some merits in the European story. However, they are spending very little premium, less than usual. That is especially the case if you look at cross-asset funds, where the premium spend is on average about half of what it normally is. That is the situation as regards the first two factors of vulnerability. On the third count – are there any leveraged positions that are particularly exposed? The answer is again no. Yes, there is more interest in participating in carry trades. Yes, there are net selling flows in options from investors. However, neither are being implemented in such a way as to create a Volmaggedon-type scenario. So, market vulnerability is not extreme in my view. Indeed, we have had several recent examples of resilience in the market. In August last year, we witnessed the biggest intraday increase in the history of the VIX. But that event only lasted one day. The market reaction to concerns over artificial intelligence capex in January was also very circumscribed as an event – it was very specific and faded quickly.Nevertheless, there are plenty of risks, such as tariffs, as you identified. Which other ones are you monitoring?The big unknown is the continuation of US retail investors’ behavior, which is a major force in options markets. Nobody knows when they will change from their bullish direction. It really is a parameter that is outside our knowledge, or control, or ability to monitor.Going back to Europe, how has the volatility market developed there and what trading opportunities has it offered?Last year there was a lot of interest in trading the VSTOXX, particularly related to strategies around the French and US elections, as well as whenever there was a shock event. Around the French elections, there was a staggeringly high increase in VSTOXX volumes, with a lot of market participants trading. The ease of structuring very successful trades was smooth and many of our clients were very successful in fading the increase in risk premium through those VSTOXX structures.What were the most popular of those structures?We mostly recommended 1x2 put ratio spread trades, because the vol of vol was so high. They worked as a defensive way to fade the volatility spike and also take advantage of that very elevated vol of vol. These are quite common structures, but to use them successfully, timing is extremely important. You can't just do it randomly – execution needs to be very well timed around the buildup of an excessive risk premium, which is what we saw leading up to the French election.Looking ahead to next year, my top conviction trade is EURO STOXX 50 1Y ATM upvar. I will be expanding on this at the Derivatives Forum next week!Visit the panel at Derivatives Forum Frankfurt on 26 February from 14:15-15:00 CETNavigating volatility: trading European volatility markets in a year of macro events and electionsOur panelists will discuss volatility and its drivers in recent months and what is in store for the upcoming year, with a particular focus on VSTOXX.  -    What are the opportunities for trading VSTOXX options and futures based on a variety of market outlooks?-    What is the role of VSTOXX as a gauge of European market volatility?-    What is the US perspective on European volatility and do how investors trade it.Moderator: Russell Rhoads, PhD, CFA, Associate Clinical Professor, Kelley School of Business, Indiana UniversitySpeakers:Davide Silvestrini, Head of EMEA Equity Derivatives Strategy, J.P. MorganSophie Granchi, Sales EMEA, Equity & Index Sales EMEA, EurexCôme Legal, Derivatives Dislocation Portfolio Manager, Adapt Investment Managers (AIM)Ousmane Diop, Portfolio Manager, Capstone Investment AdvisorsWeiter zum vollständigen Artikel bei Deutsche Boerse AG Unsponsored American Deposit Weiter zum vollständigen Artikel bei Deutsche Boerse AG Unsponsored American Deposit