13 June 2016 at 13:43 GMT
- Investors dumped stocks and bid bonds and gold higher last week
- The VIX fear gauge broke free of its $13.50 to $16.50 range
- Gold might be getting ready for the next leg ahead
- Volatility on the SPDR Euro Stoxx 50 (FEZ) has spiked near 3-month high
The rally seems to be ending as fear digs in. Pic: iStock
By Georgio Stoev
After what appeared to be a strong week things finished badly as investors finally pulled the wire on stocks and bid up the prices of bonds and gold. We have seen the CBOE VIX near the low end of its 52-week range, for the last three months. At the same time, equities rose pretty much uninterrupted. The "fear gauge" finally broke the range between $13.50 and $16.50 with a snap. On Friday, the index closed up commanding 26%.
Gold continued to make gains and investors should take a closer look at GLD as it might be getting ready for the next leg up. If so, a short put or short put spread could be one way to trade it. For July 120 puts are selling at $2 or 1.6% with market assuming 60% probability that these options expire OTM. If one is to hedge the downside, the latter of the two strategies would be more appropriate.
European stocks lost their footing as well on Friday closing down 1.5%. With it the volatility on the SPDR Euro Stoxx 50 (FEZ) has spiked near 3-month high. Despite of the high volatility in the front month options, investors could still trade this instrument directionally through a spread or a single option.
Last week's ideas
In last week's addition we highlighted the SPDR Financial Sector (XLF) as having a divergence. The sector was under pressure and closed into the negative 2.1%. JP Morgan (JPM) also shed over 2%. We believe the timing is still right for a directional trade either with the ETF or the stock.
This week's ideas
We outlined a trade idea with the SPDR Consumer Discretionary ETF
) for a good risk/reward. In addition, the high-yield bond market or (HYG) could be a good short trade as flight to safety maybe on the way. HYG seeks capital appreciation on non-investment greade bonds (sub-BBB), which tend to underfperform in times of uncertainty.
Good week ahead!
– Edited by Clare MacCarthy
Georgio Stoev is futures and options product manager at Saxo Bank