Article / Monday at 14:38 GMT

Volatility Update: Equities steady while commodities on the run

Product Manager Futures and Options / Saxo Bank
Denmark
  • Equity markets largely unfazed by Fed's 25 bps rate hike last week
  • Bond market rally sends 10-year Treasury yield to 7-month low
  • VIX contained, yet again, after another attempt higher
  • Crops got a big lift due to weather worries and some short-covering
  • Energy remained under pressure last week, with light crude off another 3%
  • Implied volatility continues to move lower
  • A short put on the Nasdaq 100 is one way to trade for increased volatility

Speed abstract
 Implied volatility declined last week, but options are not cheap 
by any means. Photo: Shutterstock

By Georgio Stoev

Equity markets barely blinked at the US Federal Reserve's largely anticipated quarter-point rate hike last week. Volatility, however, made its presence known in other markets. Let's have a look at last week's action.

Weekly Source: QuikStrike

Seasonality and investors had a say in how "soft" commodities traded last week. Crops got a big lift primarily due to weather worries and some short-covering. Saxo Bank's commodities strategy chief Ole Hansen outlined some of the fundamentals driving crops higher in his outlook last week. The volatility in the crop market has manifested itself in the form of a forward skew, that is increased demand for out-of-the-money calls and in-the-money puts. So the market is fears a shortage in KC wheat.
KC Wheat
Source: QuikStrike

Energy remained under pressure last week, with light crude oil (CLQ7) off another 3% for the week. On Friday, the contract tested May's low of $44.45/barrel, and seems to be bouncing. The max pain in open interest is a $45 strike price for puts and $52 for calls. The put-to-call ratio is at 0.62, with some bias to the upside. We saw an unusual trade on Friday when someone traded 100 contracts of H8 (March '18).

WTI H8
Source: QuikStrike

Despite the drop in prices, volatility, as measured by the implied volatility, continues to move lower. Nevertheless, options are not cheap by any means. The skew is towards the call, particularly the ones with delta of 15 and 20. At the time of writing, these would cost $48 and $49. To offset the higher cost of buying calls, investors could use a call spread or sell some premium (short puts).

Volatility opportunity

If you are looking for some increased volatility, the Nasdaq 100 Index has been providing plenty of opportunity recently. Big-name US tech stocks have been under pressure, and, as prices have fallen, volatility across near-term expirations has been on the rise, despite the 10% loss last week. 

Trade idea

A short put with a strike price of 5,400 could be sold for a net premium of 20, or $400 NQU7 (July 32 DTE). The puts have a delta of 14, making them likely to expire out-of-the-money. 

Finally, big thanks to those of you who made it to Copenhagen for the options seminar. We appreciated meeting with you to talk about options. We also welcomed Russell Rhoads from the CBOE Options Institute, and we are puzzled by how Russell managed to squeeze in his last Weekend Review. The CME Group was also on deck and, of course, we talked about oil, E-minis and gold among the many assets the exchange covers. We did miss QuikStrike's Nick Howard who unfortunately couldn't attend.

Have a great week.


— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank

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