Surge in Europe Stock Options Volume Shows Race to Hedge Greece

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Whatever happens after Greece’s vote, stock investors have had time to prepare.

They’ve taken action in the options market to hedge against equity selloffs, trading an average of 1.6 million Euro Stoxx 50 Index contracts each day in the past month -- the most since 2011. The gauge fell 2.2 percent on Monday, after Greeks voted 61 percent to 39 percent to reject terms of a European Union bailout, the Interior Ministry said.

Gauges of equity volatility have surged in European markets, where a first-quarter rally that added almost $2 trillion to share prices has roughly cut in half on concern Greece will exit the euro. The VStoxx Index jumped 21 percent last week and touched its highest level since 2012 as equities posted their biggest decline in 3 1/2 years on June 29.

“There will be so much volatility in the next weeks and so much pain,” said John Plassard, vice president at Mirabaud Securities LLP in Geneva. “It’s not a matter of only ‘no’ versus ‘yes,’ but other countries like Spain may also ask for less austerity, and this creates a fear for global economic policies.”

Credit Suisse Group AG said on Friday that the probability of Greece leaving the euro would be 75 percent with a “no” vote. UBS Group AG estimated a 70 percent chance.

Dominating Sentiment

While Greece accounts for less than 2 percent of the euro-area economy, its impasse with creditors has dominated sentiment among stock investors. The Euro Stoxx 50 had its worst week of the year, falling 5 percent and reaching a four-month low. Concern has spilled into American equities, which posted their biggest weekly retreat since March.

In Europe, banks and brokerages bore the brunt of losses over the past five trading days, while shares in Italy and Spain dropped the most among developed markets. Greek lenders and the Athens Stock Exchange were shut and are scheduled to remain closed until July 6.

Demand for options contracts that can serve as protection against stock swings jumped as polls last week showed the vote was too close to call. On Friday, bearish bets on the region’s lenders surged to an almost one-month high after someone traded a block of 20,000 puts wagering on a 2.7 percent decline in the Euro Stoxx Banks Index by July 17.

U.S. ETF

A U.S.-listed exchange-traded fund tracking Greek equities, one of the only ways still available to bet on the shares, fell 7.9 percent in the past four trading days. It slumped 19 percent on Monday and regained half its losses the next three days.

“The victory of ‘no’ will weigh heavily on European equity markets, which will be pricing in the increased probability of a Grexit,” said Steven Santos, a broker at Banco de Investimento Global SA in Lisbon. “Many people were actually still banking on a comfortable ‘yes.’”

Even with the selloff, many investors and strategists remained bullish on European equities, counting on central-bank stimulus and an improving economy to help them recover the losses. With the Euro Stoxx 50 trading at 14.8 times estimated profit for its members -- less than the valuation for U.S. or Japanese shares -- some traders saw a buying opportunity.

Barclays Plc and Credit Suisse were among banks that kept their Euro Stoxx 50 year-end forecast last week. They both estimate the index will be at 4,000 in December, implying a 16 percent rebound from Friday’s close. Goldman Sachs Group Inc. expects it will reach 4,200 in the next 12 months.

Stay Calm

“A ‘no’ vote doesn’t necessarily equate to a Greek exit,” said Yogi Dewan, founder of Hassium Asset Management, which oversees $1 billion from Gerrards Cross in the U.K. “Investors need to stay calm and just let things play out.”

Still, five of the six most-owned Euro Stoxx 50 options were bearish. In the U.S., the VIX, which tracks Standard & Poor’s 500 Index volatility, jumped 20 percent last week, the most since January.

“The Greek situation has taken a couple years to unwind, but the day of reckoning is upon us,” Jeff Sica, who oversees $1.5 billion as president and chief executive officer of Circle Squared Alternative Investments in Morristown, New Jersey, said at the end of last week. “There’s a whole domino effect that could take place here if the ECB doesn’t manage this correctly.”

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