Article / 22 August 2016 at 12:30 GMT

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

Product Manager Futures and Options / Saxo Bank
  • 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 

22 August
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?
22 August
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
22 August
Feders Feders


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail