Article / 24 April 2017 at 12:35 GMT

Volatility Update: Euro Stoxx 50 volatility plunges — #SaxoStrats

Product Manager, Options Trader, Educator
  • Outcome of Sunday's first-round presidential election triggers broad relief rally
  • Euro Stoxx 50 index gained 3.8% largely due to strength in French shares
  • Euro Stoxx VSTOXX volatility index slid 30% at opening of European trading
  • European investors seem willing to embrace risk and bid equities higher
  • US earnings season at full blast this week with results from Apple and Amazon
  • President Trump to showcase his tax reform plan this week

French and EU flags
 The outcome of Sunday's first-round presidential ballot in France 
seems to have quashed "Frexit" fears. Photo: Shutterstock

By Georgio Stoev

European markets breathed a sigh of relief on Monday at the outcome of Sunday's first round of the French presidential election, with the centrist candidate Emannuel Macron scoring a solid victory ahead of the far-right's Marine Le Pen, who also goes through to the May 7 second round where Macron is tipped to win.

The Euro Stoxx 50 index gained 3.8% largely due to strength in French equities. France has the biggest weight in the index at 35.6% closely followed by Germany.

As fear of "Frexit" seems to have vanished, at least for the time being, volatility has crashed.  At of the time of writing, the European volatility benchmark VSTOXX (OVS:xeur) is trading down 7.35 points at 17.71, or down 30%. 

European volatility benchmark drops sharply

Source: Saxo Bank

Volatility on the other side of the Atlantic is also collapsing. In extended hours,  2 am-8:15 am Chicago time, the CBOE Volatility Index (VIX) is down $3.26 at $11.37, or a loss of 22.2%. We could see another full point down when the US markets open. 

All this leaves the door wide open for the bulls. The E-mini S&P 500 (ES) is up 27 handles, within a hair of the 30-day high of 2,375 points. This marks a huge turnaround from Friday's close and increased demand for out-the-money put options. The graph below shows the uptick in the 15 Delta puts as of last Friday. This led to increased implied volatility.

ESM7 Put Skew Source: QuickStrike

After today's rally, we could expect traders to reduce their hedging positions on the S&P 500 and bid out-of-the-money calls.

Big week in earnings

The first-quarter earnings season is now in full swing. Dow components IBM and Goldman Sachs reported last Wednesday and saw their shares decline after lacklustre results. IBM now has missed five of the last nine quarterly revenue estimates. Goldman's earnings also surprised negatively, and investors dumped shares on the news. The stock is now sitting at at five-month low at $216.86. 

Goldman's rivals Morgan Stanley and Bank of America both beat expectations on higher rates and fixed-income trading. But investors seem to have turned wary on financials nowadays. For those who are bullish on the sector, current levels could provide good entry points. For instance, the 19 May 17 215 put sells for $4.10 with 25 days to go. This is roughly a 2% return on cash ($410/$21,500) with breakeven at $210.90. 

Tech behemoths Apple and Amazon report quarterly earnings this week, and Saxo Bank's Peter Garnry on Friday provided a view of what to expect from these two. Expectations are high as the stocks are hovering near all-time highs. 

The street is expecting Amazon to deliver stellar results on both top and bottom lines when it reports on April 27. Estimates are for EPS of $2.28 for the quarter, or 27% year-on-year growth. That's steep, but it's Amazon. The options market is pricing a $50 move for 19 May 17 expiration, or a 5.6% jump. Apple reports tomorrow, April 25, and expectations as of Friday indicated by its 28 April 17 (weekly) straddle are for the stock to move $2.50, or 1.7%. We will provide a trade view on Apple later today.

Trump tax proposal

Later this week US president Donald Trump is due to reveal his largely anticipated tax plan. The proposal will look to reduce marginal tax rates for individuals and businesses, repeal or eliminate the alternative minimum tax, eliminate gift taxes and tax the profits of foreign subsidiaries of US companies. According to the Tax Policy Center of the Brookings Institute, this will lead to a loss of $9.5 trillion of tax revenue over the next decade. 

It will be another exciting week in the market place. Successful trading everyone.

— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank


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