Article / 15 December 2015 at 14:00 GMT

Volatility Update: Options traders jostle for position

Product Manager, Options Trader, Educator
  • Surge in puts shows traders trying to protect against post-FOMC swings
  • EuroStoxx 50 options signalling expectations of a downside move
  • Options expiration week means trading volumes likely to spike

Options markets are heating up ahead of both the FOMC announcement 
and a quadruple-witching expirations week. Photo: iStock

By Georgio Stoev

Investors are getting progressively jumpier as the Federal Reserve's rate decision closes in. The US central bank is widely expected to announce a liftoff in restrictive monetary policy, but the language or guidance will be key in terms of reading the impact on equities and bonds. 

Over the last week, the S&P 500 Volatility Index has climbed some 50% to a high of $25.27 as traders make last-minute adjustments to their portfolios. We have witnessed a surge in put options leading one to believe that investors are trying to prepare themselves against a number of possible outcomes. 

For the week of December 7-December 11 the most-traded products for the EuroStoxx 50 had strike prices of 3,200, 3,100 and 3,000 – all levels at or below the current price of the underlying index. As a result, the volatility continues to be skewed towards out-of-the-money options, particularly puts. 

most traded
vol smile

As far as US equities go, traders extended to January out-of-the-money puts with various strike prices; the most open interest was created by the January'16 1,900 puts. 

It is important to note that much of the volume seen on exchanges nowadays comes in the form of a spread. A spread is created by a short option and a long option with different strike prices within the same expiration cycle (i.e. short 1 January'16 2,100 call and long 1 January'16 2,200). 

top eminis (For those interested in learning more about spread trading, please make sure to join us in January as we explain how to use these sophisticated option strategies.)

Besides the announcement from the Fed, traders are actively managing their options positions as it is options expiration week. To top it off, it is a quadrupled "witching" expiration with the maturities of futures and the three categories of options (equity, index and options on futures) all coming to expiration. 

As the term of the contracts are coming to an end, traders will look to close out existing positions and either establish new ones or roll out into the next expiration. Therefore, an increased volume in option trading and volatility could be expected over the next couple of days. 

— Edited by Michael McKenna

Georgio Stoev is Futures and Options Product Manager at Saxo Bank
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