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The EU Volatility Index is the European volatility benchmark, giving traders an indicator of the near-term predicted levels of volatility in the European stock market. It’s designed to reflect investors’ sentiment and the overall level of economic uncertainty, by measuring the 30-day implied volatility of the Euro Stoxx 50 index.
Trading CFDs on the EU Volatility Index futures market presents potential trading opportunities. It offers an accurate and cost-effective way to take a view on European volatility, and is considered the most accurate way to hedge against any existing exposure a trader may have to European market volatility.
The EU Volatility Index is the European equivalent of the more well-known US version – the Volatility (VIX) Index, which reflects investors’ view on US stock market volatility over the next 30 days through the S&P 500 index.Key Points
There are some potential moves a trader in the index can make, based on the prevailing market sentiment. If you’re expecting equity markets to fall, you might take a long position in the EU Volatility Index, while simultaneously hedging against downward moves in the European equity market, through the Euro 50, which is based on Europe’s benchmark market capitalisation-weighted stock index, comprising blue-chip eurozone stocks.
The EU Volatility Index has a negative correlation to the Euro 50 index on a long-term basis. In general, volatility usually rises during a bear market crash in indices.
One of the main risks when trading on the instrument is that volatility futures can rise significantly more than the underlying index might fall. For example, from 1 August to 30 September 2022, the Euro 50 index fell 12%, while the EU Volatility Index jumped 60%. In March 2023, the Euro 50 fell by 8%, while the EU Volatility Index leapt 77%.
As a result of this correlation, the EU Volatility Index tends to move to the upside when all other asset classes are declining. Therefore, it has proven to be a relevant hedge in times of both global crises, like the 2008 financial crisis, and 24 August 2015 market meltdown, as well as EU-related crises, like the Greek debt crisis in 2015, Brexit in 2016, or the start of the Russia-Ukraine war in 2022.
A volatility index measures the expectancy of future stock index movements, and the EU Volatility Index measures expected volatility in the Euro Stoxx 50 index over the next 30 days.The index value is an "annualised standard deviation", meaning that if the EU Volatility Index is at 20:
Time horizons for standard deviation (also known as volatility) scale with the square root of time. So, to translate an EU Volatility Index value of 20 into how much the market expects the Euro 50 to move in the next 30 days (about 1/12th of a year), we divide by the square root of 12, or around 3.5. This means that when the EU Volatility Index is at 20, the market expects:
Standard deviation is a measure of variation of a set of values. A low standard deviation indicates that the values tend to be close to the mean (or expected value) of the set, while a high standard deviation indicates the values are spread over a wider range.
By opening the charts of the Euro 50 - Cash and EU Volatility Index, you can take a look at the correlation between the two indices, as well as the comparative volatility.