Article / 20 June 2016 at 14:45 GMT

Volatility Update: Fears pound equities, volatility rises

Product Manager Futures and Options / Saxo Bank
  • VIX breaks three-month consolidation trend
  • Utilities, basic materials outperform on S&P 500
  • Bank of America could be primed for a bullish play

Equity investors can expect some twists and turns as volatility heats up, 
but there remain some bullish plays out there. Photo: iStock 

By Georgio Stoev

Volatility returned to the market as the "fear" index (VIX) finally broke its three-month consolidation. Investors renewed their interest in options, albeit mostly in buying put options.  

As the fear came back, equities declined and nine out of the 10 S&P 500 sectors closed down. The worst hit were healthcare (minus 2.36%) and conglomerates (minus 1.94%). 

Naturally, the only index into the black was utilities (0.23%). Here's how prices on selected assets closed for the week of June 13-17:

Weekly ETFs

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Source: Saxo Bank

Gold well-positioned

We continue to see strength in gold. Saxo Bank head of commodities strategy Ole Hansen sees strong demand in the exchange-traded fund backed by the commodity. Investors with a long-term horizon (six to nine months) could accumulate here or use longer-dated call options of the ETF. 

However, if you on the shorter time horizon, you'd need to confirm the break above $123.93. Upon a break, option users could use a call spread, for example the 19 Aug 16 123/128 call spread. As of Friday, the spread was priced at $1.94.

A little patience

With equities now failing to move above their 52-week high for eighth time, investors should select new positions carefully. It really is a stock picker's market which requires a lot of patience. 

It helps to have a good sense of relativity in the market and how different sectors are performing. The US S&P 500, for instance, is composed of roughly 10 sectors; technology, financials and services are the largest ones and these naturally attract the most investors. 

The much smaller utilities and basic materials sectors, however, have been the best performers year-to-date, up 17% and 14% respectively.

Eurostoxx 50 options volatility high

Volatility appears to be stretched out like an elastic band ready to snap, mostly due to the uncertainty around the Brexit vote. We don't expect that volatility to move much higher from current levels, but rather to normalise or revert to its mean near 20. 
Implied Vol
The high implied volatility, particular with out-of-the money options, could give options sellers rich premiums and better risk/reward. We must note that high IV only suggests high option prices; it does not tell us which way the price will move. 

Options users maintaining a bullish outlook on European equities could extend to short vertical put spreads on FEZ (Eurostoxx 50) 22 July 16 31/29. The spread was priced at .55 as of Friday. 

Last week's trades

We moved with a long vertical put spread in the consumer discretionary sector (XLY). Our target is $77 and we have till 15 July on this defined risk spread.

This week's ideas

We have a couple of bullish ideas this week:

Bank of America (BAC) and retailer Michael Kors (KORS) look interesting from a pure technical view. While BAC is looking for reversal and a close $13.74 will confirm that, KORS closed strongly on Friday and could move further up.

Restaurants part of the large services sector are trading mixed. While Darden Restaurants is near a 52-week high, Chipotle Mexican Grill is trading near its 52-week low. We like to see this share move below $388.58 before moving in with a bearish trade.

Covered calls could make a lot of sense if you are neutral on the market and you hold stocks like Apple. For the last August 100 Calls could be sold for $2. 

Have a good week ahead!

— Edited by Michael McKenna

Georgio Stoev is futures and options product manager at Saxo Bank 
20 June
Market Predator Market Predator
This is nice sentence: "nine out of the 10 S&P 500 sectors closed down. The worst hit were healthcare (minus 2.36%) and conglomerates (minus 1.94%)."
Yet I've no idea how SP500 is structured :-/
Thanks for your ideas and WOW webinars Mr. Stoev, it's very inspirative for me.
20 June
Market Predator Market Predator
Q: Does the Saxotrader offer way how to measure SP500 sectors performance? Thx.
21 June
Georgio Stoev Georgio Stoev
Thx for the feedback MP, on saxotrader (downloadable version), if you open a chart, you'd be able to compare different sectors/instruments simply adding them one at a time (XLF, XLB, XL, XLY and so on) use line instead of candle stick.
21 June
Market Predator Market Predator
I used key word "select sector sp" in Instrument Explorer to try to find appropriate SP500 sectors. Do you think is this key word correct, or is even better one available?
I can see seven sectors, but You mentioned 10 (in the article above). Thx
21 June
Georgio Stoev Georgio Stoev
I am glad to see digging some stuff out:)
21 June
vsquare007 vsquare007
Georgio what do you think about this trade idea based on expected move down with AXP

AXP debit spread option at 62.5/60 for $100 premium with 1 contract with 24 days to expiry as option trade idea ?
22 June
Georgio Stoev Georgio Stoev
Hi vsquare007, you could trade August 62.5/60 put spread- just about $1.05 per contract.
23 June
vsquare007 vsquare007
okay thanks Georgio


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