A Classic Reimagined

• 

  Serge Nussbaumer
  Chefredaktor

Mini futures have been an integral part of stock market trading for years and are very popular with active investors. They make it possible to participate disproportionately in the price performance of an underlying asset with a comparatively low capital investment – both when prices are rising and falling. This instrument becomes particularly exciting when it is issued on the volatility index, such as the VIX. The VIX measures the expected fluctuation range of the S&P 500 and is regarded as a barometer for nervousness on the markets. Until now, mini futures were mainly known as open-end products, but now there is an interesting innovation: mini futures on the volatility index with a fixed term.

ZKB Sets New Standards

It was the first bank in Switzerland to launch a series of mini-futures with a fixed term on the VIX with different expiry dates. The bank is thus setting a milestone in the field of structured products and for the first time offering investors the opportunity to bet on the development of volatility in a targeted manner and without rolling losses. These products are of particular interest to investors who wish to realize a specific market expectation within a clearly defined period of time.

The Silent Yield Killer

The basic principle of mini futures is quickly explained: the investor only invests a fraction of the underlying, the issuer finances the rest. An integrated stop-loss level protects against margin calls and limits the risk to the amount invested. With classic mini futures with an unlimited term, however, a problem arises that is particularly significant with underlyings such as the VIX: rolling losses. These losses arise because the issuer must constantly adjust the position to the current futures contracts in order to ensure the pricing of the product. As the forward structure of the VIX future is often quoted in contango, i.e. the longer-term futures are more expensive than the short-term futures, the constant rolling leads to a gradual loss in value of the mini-futures, even if the VIX hardly moves.

The Fixed-Term Implementation Offers Greater Transparency

This is precisely where the innovation of the new mini-futures with a fixed term comes in. As the product has a defined end date, there is no need to constantly roll the position. The investor is therefore no longer exposed to the creeping loss of value due to rolling costs. The financing costs are fixed and transparent over the term, which makes the performance of the product much easier to plan. At the end of the term, the mini future is simply settled at the current value without the investor having to worry about managing the position. This makes this product variant particularly attractive for anyone who wants to bet on a specific volatility trend within a fixed period.

What Investors Need to Know

The leverage effect is also retained with the new mini futures. Investors continue to benefit disproportionately from movements in the volatility index. The stop-loss level protects against margin calls and limits the risk to the capital invested. However, the risk of a total loss remains, especially if the underlying asset moves strongly against the investor’s own position or the stop-loss level is triggered. In such cases, the redemption amount can be very low. Nevertheless, the fixed term ensures clear calculability and prevents rolling losses, which are difficult to understand for many investors and have been a major shortcoming of volatility products to date.

New Perspectives on Volatility Management

Overall, mini futures on the volatility index with a fixed term offer an innovative and cost-efficient opportunity to make targeted bets on the development of market volatility. They combine the familiar advantages of classic mini futures – such as leverage, transparency and loss limitation – with the predictability and cost efficiency of a fixed term. This opens up new perspectives for active volatility management and portfolio diversification.

An exciting alternative to traditional portfolio hedging could be the use of a mini-futures long on the VIX in order to profit from rising volatility in phases of increasing uncertainty. Conversely, mini futures short on the VIX offer the opportunity to generate income when market fears decrease or generally in times of negative market developments. These strategies enable investors to react flexibly to various market scenarios and to hedge or align their portfolios in a targeted manner.

All currently active products on the VIX with a fixed term, whether short or long, can be found here.