Article / 23 May 2016 at 13:00 GMT

Volatility Update: Fed's rhetoric scares some but not enough

Product Manager, Options Trader, Educator
  • Markets are swinging in a way that is all too reminiscent of musical chairs
  • VIX futures continue in contango (spot price trading below futures spot price) 
  • Traders' expectations seem to be on the low side, for now
  • Stocks like McDonald's, Coca-Cola and Boeing may extend their losses

Bulls and Bears
Some ideas for bulls and bears and those in between. Photo: iStock 

By Georgio Stoev

For a bull or a bear this market could cause an equal amount of anxiety. Equities continue their grind away in "la-la" land - one day up, another down. Just like in a game of musical chairs, investors quickly found their seat on Wednesday when the Fed suggested a possible June rate hike.

On Thursday, just as quickly, investors went back to their funk furnished by better-than-expected homes sales. Here's how markets fared for the week ending May 20. 

Resilient equities amid increased volatility trading
VIX Daily

Source: Saxo Bank

While the CBOE Volatility Index (VIX) finished the week up 9.5% at $16.39, the VXX (iPath S&P 500 VIX Short-term Futures) finished flat at $15.10 trading below the former. As the VXX is consisted of first and second month VIX futures, it typically trades above the index during low volatility as it prices in higher volatility in the future. 

Not the case here as the VIX futures continue its contango (spot price trading below futures spot price) and traders expectations seem to be on the low side, for now. 

Nevertheless, with VIX on the move we could see another attempted to breakaway from its 2-month sideways grind.  For those looking for VIX upside, we initiated a VIX bull trade last week

For bulls..

If you are on the bullish side, XLE may be prompt to resume its upward momentum after two-week consolidation. We remain bullish in the next 1-2 months on the energy tracking fund

..and bears

The bears could go after the "dogs" of the Dow. The blue chip index seems to be rolling over and breaking below a head-and-shoulder formation. Stocks like McDonald's, Coca-Cola and Boeing breaking their support levels and may extend their losses. The put-to-call on these continues to be low which suggests that puts are not yet overvalued. Investors could look July expiration as single or in combination (bear put). 


Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

..and all others

Finally, for those neither bullish or bearish and have the patience, iron condors and calendar spreads seem to be working albeit lower premiums. 

Bonds (TLT, an ETF that offers fairly liquid options and volatility has become a great trading vehicle over the past couple of years),  are showing a good range-bounded trading ($127-$133) and could remain locked in for at least through the next Fed meeting. Gold also seems to be in consolidation and ideal candidate for this delta-neutral, time decay strategy. 

Have a great week ahead!

— Edited by Clemens Bomsdorf

Georgio Stoev is futures and options product manager at Saxo Bank 


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