It appears options on European equities are (rightfully) reflecting investor concern about the near-term volatility associated with a possible Greek exit from the European Union. How do we know? Just as the options index known as VIX is touted as the fear gauge for U.S. equities, the V2X, or “VSTOXX,” plays a similar role for European equities. See how much the spread between the V2X and VIX has rallied in the last few months, reaching nearly the same level it did in 2011, the last time uncertainty about a Greek default began spilling over to other markets:
This is not surprising. Both the VIX and V2X are based on one-month options on their respective indices (the S&P 500 and the Eurostoxx 50). And it’s pretty easy to make a case that no matter what the outcome is between Greece and the EU, European equities might be substantially more volatile than U.S. equities over the next month or so.
What’s more interesting is how the volatility futures market suggests that we’ll know the outcome soon:
Notice the very low spread in just a few months. To be sure, it’s possible that Europe’s Greece woes will be solved by late this year. Moreover, it’s likely that the U.S. Federal Reserve will have started raising rates, potentially increasing equity volatility in the U.S. more than in Europe, which will probably still be engaged in quantitative easing.
But given that the median historical spread between the indices is closer to 3 points over a long time frame and 4 to 5 over more recent windows, the volatility futures market appears to be overestimating just how quickly the situation in Europe will be resolved.
In our experience, problems of this magnitude do not get solved quickly. And while we’re already five years in, it’s unlikely to be solved as soon as the longer-dated futures on the index options market are suggesting.