Sterling Put Options Boosted Due To Brexit: three-month volatility has jumped 2.6 percentage points to 14.5%. It appears to be the largest single-day increase in sterling volatility since 2001. A Look At The Opportunities Yesterday #TradeSmart: if you are looking for opportunities off the back of a terror attack you have to dive a little deeper; looking at less liquid and slightly more risky assets. FTSE is Up ,the dollar is down…
Sterling Put Options Boosted Due To Brexit
24.03.2016 The UK referendum is three months away. Three-month options are a common benchmark for various types of market participants; from speculators, to fund managers to corporations and the events over the past week have raised the risks that the UK votes to leave the EU. The market responded forcefully yesterday, and even if you only follow the spot market, what is happening in the options market is significant. First, three-month volatility has jumped 2.6 percentage points to 14.5%. It appears to be the largest single-day increase in sterling volatility since 2001. The level is the highest since 2010. The move in the spot market is modest. The increase in implied (embedded in the options price) is not being driven by an increase in historical (actual) volatility. The three-month historic volatility is little changed on the day. That said it has trended higher since mid-January’s 7.3% level to 10.3% now, which is the highest since the middle of last year. The rise in implied volatility with a flat historic volatility suggests that the driver is supply and, more likely, demand for options. This is to say the increase in implied volatility now points to the buying options. And if we take it one step further, the options that are being bought, are sterling puts. Put-call parity means that puts and calls equidistant from the forward strike should trade for the same price. To the extent, they don’t show a bias in the market. That bias stood at a record yesterday. Since 2010, the discount has not been more than 3%. In 2009 and 2009 it touched 4% briefly.
Today is the largest call discount, which means the largest premium for puts since at least 2003 when the Bloomberg time series began. The price action goes hand in hand with the increased Brexit sentiment currently permeating markets. The controversy over the budget was more significant; we suspect that the terrorist attack, in pushing an opinion. The key link between the two is the Chancellor of the Exchequer Osborne. One of the leading spokespeople for the “remain” camp, has made a significant blunder that has spurred questions about his tenure as Chancellor. Those that are opposed to Brexit have largely relied on, it seems, on a negative campaign that paints a horrific picture of the consequences. That alone shows an important shift in the psychology. Even the “remain” camp struggles to articulate a positive message about the benefits of the EU. There does not appear to be a pro-EU camp. Rather the UK appears to be split between the soft EU skeptic and hard EU skeptic camps. The key take away from the development in the options market is that anxiety toward Brexit is rising and more than may be evident by sterling’s heavy tone in recent days. Activity in the options market suggests protection is being bought. It warns that sterling’s upside correction seen this month through the end of last week is over. New losses should be anticipated. The euro has fared better, but the implication of Brexit are also understood to be negative for EMU. There are economic and political channels of contagion. An economic shock in the UK, a major export market for many EU countries has knock-on effects. Others may seek a referendum on their continued membership in the EU.
A Look At The Opportunities Yesterday #TradeSmart
23.03.2016 Despite the horrendous atrocity that was yesterday’s bombings in Brussels, the markets did present opportunities. These were caused off the back of the standard “doom & gloom” fear that naturally arises when terrorist attacks hit western cities. A few years ago even the most liquid markets, such as the major stock indices, currency pairs and bonds, would have been dramatically effected by such an event.
In today’s world however, we are much more accustomed to these horrible attacks of terror. Because we are all more accustomed, to the point where we almost expect something to happen every 6 – 12 months, the markets are more accustomed and so don’t move nearly as much as they used to. Because of this, if you are looking for opportunities off the back of a terror attack you have to dive a little deeper; looking at less liquid and slightly more risky assets. The first assets to pop up are of course equities, and not just any old European or Belgium equities, but equities in the travel sector. These, as shown in both the Paris and Tunisia attacks, are highly affected by terrorist attacks. The key thing here is to look for opportunities in equities that are indirectly sold off; i.e sold off due not to them necessarily being affected, but by them being related to the sector which may be affected. The perfect stock which comes to mind, is EASYJET Plc. This company is a dominant airline in Europe and is a nice company to own even if it gets brought down to ridiculous levels by such an event. The opportunity has now been missed, but lets take a look below at what happened in the stock.
Quiet End To A Busy Week
18.03.2016 We’ve had a full calendar this week. Along with three of the largest central banks in the world holding Press Conferences, we also had a plethora of data releases coming from all the major, developed economies. Following on from the dovish Fed and hawkish BoE, we should see consolidation today, with a potential pullback as many market participants will be taking profit before the weekend on their bearish dollar trades. The global stock markets are just a whisker away from turning back in their bull market with the S&P 500 approaching the key 2050 zone. If the U.S stock market can convincingly clear this level then there is no reason why we couldn’t push on to 2130. European equities on the other hand haven’t showed us as much promise. Despite the massive injection of QE from Draghi last week, we’re still no where near our highs established during the initial QE announcement by Draghi early last year. Although the value for many lies in European equities, it seems investors would prefer to just buy bonds. It makes sense I guess; if the ECB (one of the largest financial institutions in the world) are printing money to buy up European Bonds wouldn’t you exit stocks to gain cash for front running the giant.
FTSE is Up ,the dollar is down
18.03.2016 The FTSE 100 is up Thursday due to the lower commodity prices such as oil and metals.This is largely thanks to a weakening dollar and the Federal Reserve’s decision not to hike interest rates. With a total gain of 25.63 points to 6201.12 at the close. The FTSE has outperformed the majority of other European stock markets today with export economies hit by a strong Euro. The strongest performers where mining stocks with companies such as Anglo American, Fresnillo and Glencore posting strong gains today of over 9%. Oil stocks also saw gains today with the strengthening price of crude and the affirmation that firms will meet to discuss a suspension of output. Weak performers on the FTSE today included: GlaxoClineSmith down one percent amidst news that its CEO Andrew Witty will step down next march, British American Tobacco and Hammersons were also amongst the poor performers of Thursday, with Ex-dividend shares taking 8 points off the FTSE.
