Article / 22 August 2016 at 12:30 GMT

Volatility Update: Options a good pitch with volatility in the ditch

Product Manager, Options Trader, Educator
  • Fearless markets holding gains, for now 
  • Another strong week for energy
  • Options useful as strategic investments

By Georgio Stoev

Markets continue to hold their gains without any signs of fear, for now. Here is a snapshot of different asset classes and how they fared for the week of August 15-19:

Market Week Aug 15-19

Source: Saxo Bank

European hedge

Major indices danced around all-time highs without any gains. While US equities had a flat week, their European counterpart, Euro Stoxx 50 (FEZ) dipped 1.75% despite decent economic data earlier in the month. Option traders still see some risk in the European market post-Brexit, especially for European banks accepting deposits with negative interest rates. Financials represent a significant chunk in the fund, accounting for some 21%. The current put-to-call is 0.21 FEZ suggesting a bullish view. Investors could pick up some November out-of-the-money puts for either hedge or speculation. November 16 32 put .
Gold and bonds continued their chop sideways. After reaching a high of $131 GLD has been moving sideways for five weeks now. Don't discount it and watch for a breakout above $130 or below $127 for a possible momentum trade.

Energy on the run

The energy sector (XLE) extended its strong showing by a week to show gains of 1.75%. We like the long-term bullish opportunities in the sector specifically with individual names such as Marathon Oil (MRO) and Noble Energy (NBL) as oil moves higher. Both issues are available on the SaxoTraderGO platform with listed options. A trade idea for investors could be to buy longer-dated call options for either and sell shorter-dated out-of-the-money calls.

Long Diagonal Spread
 Source: SaxoTraderGO

Possible strategy

For Marathon Oil a diagonal spread could look like this:

Buy  20 January 17 16 Call for $2.42
Sell 16 September 16 18 Call for $.30

The net debit of $2.12 could be further reduced by continuous selling of call options against the back-dated long calls (Jan 17). The position will benefit from three factors: upwards movement of the underlying price (positive delta), time decay (positive theta) and expansion in volatility (positive vega). Of course investors could vary the strategy with strike prices and expiration, i.e. buy 16 call-sell Nov 20. The strategy benefits in three out of four outcomes: Underlying stays the same, the underlying trades moderately upwards, price rallies and moves up above short call strike, and loses if the underlying price closes below long strike on expiration, i.e. MRO price below $16 in January.

Volatility strategy

VIX trade idea
Source: Saxo Bank

The intraday movements of the VIX are not materialising and failing to lift the "fear index". If you look at the market, it either opens up or down and it tends to stay there. It could be hard to make "heads" or "tails" as this chop continues. Intraday trading for VIX options could be a way to go here using in-the-money options in the weekly expiration. There seems to be a structural range between $11.37 and $13.71.
For traders looking for volatility to move up in the autumn, you could look at the 15/20 November call spread offered at $1.75. The November expiration is strategically aligned with US elections on November 8.This is defined risk strategy where the investor would risk $1.75 to potentially make $3.25 if the CBOE index goes higher.

We will resume our Weekly OptionsLab webinars on September 7th. So please make sure and join us as we speak Greeks, combination order ticket and commodities. 

– Edited by Clare MacCarthy


Georgio Stoev is futures and options product manager at Saxo Bank 

Feders Feders
Hi!, I was thinking about a diagonal spread but with Oxy (Occidental) like the one with Marathon you recomend. What do you think? regarding the greeks and comparing them with Marathon?
Georgio Stoev Georgio Stoev
Hi Feders, OXY could also be a candidate for a long diagonal spread. The position will look very similar to MRO - it's the same strategy- long delta, long theta and long vega.
Very soon will be able to see in the client station
Feders Feders


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