Eurozone worries causing index options volatility to spike
Options volatility on the four European equity indices that we track in this report have been spiking higher over the last week as the sell off in European equities has stepped up a gear. News that Greece may not be able to fulfill the terms of its bailout commitments and could run out of money, combined with a spike in Spanish governmend bond yields as some of the regions may have to ask for central government aid, have been damaging investor confidence,and protection through options have been sought.
Not surprisingly the biggest jump in volatility has been witnessed on the FTSE MIB, with OTM volatility rising by more than eight percent over the past week. The German DAX index have witnessed OTM volatility rising by more than five percent while the rise on the CAC and AEX has risen by around six percent.
As the markets have moved lower, call options have been in demand on the DAX, as some investors may have switched their positive views into options and out of stocks to cover themselves from further downside losses. Meanwhile on the FTSE MIB, the five most popular strikes during the last week have all been puts, as the multi-year low price may have attracted some index buying, with puts being bought as a protection against further losses.
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