Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 14 November 2016 at 12:50 GMT

Volatility Update: Keeping the safety belt on – #SaxoStrats

Product Manager, Options Trader, Educator
  • Investors are rushing into buying stock in financials, healthcare, industrials
  • Equities soared in election aftermath but safe havens were hammered
  • Fixed income instruments lost more than $1 trillion of their worth
  • Volatility on options on US Treasury bonds (OZB) swelled two full points

By Georgio Stoev

"Volatility is greatest at turning points, diminishing as new trends get established," – George Soros

Investors were betting heavily in US equities following the US elections. Sectors largely overlooked before are now bubbling as investors are rushing into buying stock in financials, healthcare, industrials in anticipation of increased new regulations and policies.

With the exception of interest sensitive utilities, real estate and consumer non-cyclicals, the rally was broad-based. The small cap, Russell 2000, saw its best weekly performance as it surged 10% by Friday. Here's a recap of different assets for the week November 7-11.

chart Source: the author

Assets considered safe havens in times of turmoil were punished. The long paper in US Treasuries got hammered as yields moved up on fear that inflation will accelerate following tax cuts and perhaps more government borrowing. Bloomberg reports that more than $1 trillion was wiped off the value of treasuries, municipals and similar fixed-income instruments.

As investors dumped treasuries, the implied volatility in options swelled. Volatility on options on US Treasury bonds (OZB) swelled two full points. 

Source: QuikStriek

As this chaos comes to normalisation over the next few days we see good opportunity to sell options in US treasuries. Traders could look at a short strangle or a defined risk strategy like the iron condor.

Emerging markets are also getting clobbered on the election platform promises. The weakness could provide an entry for someone looking to diversify away from developed markets. A diagonal spread involving purchase of 17 March 17 33 Calls and the sell of 20 Jan 37 Calls is priced at $2.34 as of the close Friday. With losses limited to the premium of $2.34 and the potential for two rolls (January into February), traders have an opportunity to extend profits beyond the initial $1.66 or 70% return or risk. 

Volatility to remain elevated

Despite the volatility receding some 17% last week, the VIX is showing an uptrend momentum and seems to be establishing a higher low near $14. Volatility seems to be all over the place as indicated by the CBOE volatility product page.

And while volatility as reflected by SPX options went down, the volatility on certain large cap names such as Amazon, Netflix and Apple went up. Amazon shares suffered some 5.75% loss last week. 


For investors long shares in Amazon, this may be a good time to sell some premium in the market. December 16 770 Call last traded on Friday at $11.45. Although the premium collected will not completely protect you against suffering further losses, it will cushion some of the impact. Covered calls could be implemented for any equity position for which you do not expect prices to rise over the near term. To get the details of how a covered call could be effectively implemented, please watch our webinar.

With this huge surge in stock prices, investors should be cautious and expect volatility to return as equities overheat.

Have a great week!

– Edited by Clare MacCarthy


Georgio Stoev is futures and options product manager at Saxo Bank 

Market Predator Market Predator
@Georgio: very good article! If only we could have Vols tickers in Saxo platform (e.g. OZB and others). BTW, good link: Thx!
Market Predator Market Predator
Interesting to see post Trump divergence between: Russel and Nasdaq (tech Stocks)
Georgio Stoev Georgio Stoev
We are working on it
Market Predator Market Predator
I got you, perfect :)


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