Article / 10 November 2015 at 8:39 GMT

Volatility Uncovered: Where do we go from here?

Product Manager, Options Trader, Educator
  • Despite the big nonfarm payrolls number the VIX traded mostly unchanged
  • The impact of NFP has created a mixed bag of top-traded options
  • Volatility could spike as traders readjust their positions in the short term

By Georgio Stoev

The somewhat bloated equities markets across the US and Europe did not show much movement last week and finished it mostly unchanged. Both the S&P 500 in the US and the Euro Stoxx 50 of Europe were off by less than 1% for the week. The strong rally in October is starting to feel top heavy. 

On Friday, the US nonfarm payroll report surprised the markets by adding 271,000 jobs in October. The reading was the strongest since last December. Traders took the news in their stride which contributed to a volatile Friday trading session.

The NFP numbers contributed to a volatile trading session on Friday. Photo: iStock

Overall the fear gauge, the VIX, traded mostly unchanged between $13.71 and $16.39. Meanwhile, the implied volatility for the e-minis options continues to drip down to levels that existed before the volatility explosion days in late August. This implied volatility is one of the core components in an options value model. When it moves down, so does the price of an option - all things being equal.

VIX monthly movements
E-Minis Volatility

Source: Bloomberg - Saxo Bank

In this low volatility, mostly bullish run, the top traded e-minis could appear slightly dumbfounded. From one end, the possibilities of a Federal Reserve hike in December could be bearish for equities, while on the other, the positive employment report should be bullish for the US economy. As a result, we have somewhat of a mixed bag of top traded options.

e-minis top traded

Last week traders favoured at-the-money calls with strike prices 2100 and 2180. On the put side, most actively traded were the strikes 1900, 1950 and some as far out of the money as  1,775. 

In conclusion, equities appear to be overbought and a pullback at these levels is needed for the bullish trend to further develop itself. However, we could expect the volatility to spike up a little bit as traders readjust their positions in the next week or two. 

Have a productive week!

-- Edited by Adam Courtenay

Georgio Stoev is an institutional account manager at Saxo Bank.
fxtime fxtime
Presume you are looking for a VIX spike upto 28+ to short? As it is often safer to await the spike up before entering VIX trades as they command high margin and corrode rapidly on theta models if long. Waiting for volatility can be VERY expensive if long VIX....usually I have price alerts set for 27> then watch where the market rises to (VIX) drops to SPX as the extreme spread is usually a safer play!!
Georgio Stoev Georgio Stoev
Spot on, FXtime...Careful trading VIX options unless vol is through the roof. Which it isn't.
I'm not good at predicting price levels, but patiently waiting for some vol increase before opening any short positions.


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