A Month Out From French Vote, Traders Bet on Europe Stock CalmBy
VStoxx put volume surges, with traders paying up for options
Put-to-call ratio of 1.3-to-1 contrasts with 0.4 for VIX
With the first round of French voting less than a month away, one could be forgiven for betting on an increase in European equity volatility. But the opposite is happening.
A record volume of options wagering on a drop in the VStoxx Index changed hands this month, three times more than contracts positioning for more swings. That’s pushed the number of outstanding puts to calls on the gauge to its highest level since the aftermath of the U.K. vote on European Union membership, when the VStoxx slumped as investors unloaded their protection.
Traders’ concerns about the rise of populism in the region are easing following the Liberals’ victory in the Netherlands last week. After sending the cost of hedging against stock swings flying in February, many managers have become more sanguine about the result of the French presidential vote, with polls suggesting euroskeptic Marine Le Pen would be defeated by a wide margin in the second round.
“The risk of a Marine Le Pen win is still here, but investors started to worry too early in the year, and now they are closing their bearish bets,” said Anthony Benichou, a cross-assets sales trader at Louis Capital Markets in London. His team recommended in January to bet on a volatility slump following the French vote. “Puts are very expensive, reflecting that investors are positioning for a drop in volatility.”
The cost of VStoxx puts expiring in the next month climbed to the highest level since August 2015 relative to calls, data compiled by Bloomberg show. The most-owned contracts expire in April and have strikes of 20 and 22, below the current futures level. In March, almost 43,000 options positioning for a drop in volatility changed hands on average each day, compared with about 14,000 calls.
The high put volume could be due to investors using strategies involving several legs, often a way to cheapen the overall cost of a trade. BNP Paribas SA recommended last week to short April puts on the VStoxx while buying June contracts. JPMorgan Chase & Co. advised on Wednesday to buy May puts, financed by the sale of options on its U.S. counterpart, the CBOE Volatility Index.
The trend is different there, where investors have been preparing for rising stock swings. There are about 5.8 million VIX calls outstanding, more than twice as many as puts. For the VStoxx, the put-to-call ratio jumped to 1.3-to-1 following this week’s expiration.
Pravit Chintawongvanich, head of risk strategy at Macro Risk Advisors in New York, says VStoxx futures could keep on falling if Le Pen continues to drop in polls. He recommended put strategies to bet on a collapse of volatility following the French vote.
“If Le Pen loses the election, VStoxx futures would almost certainly have a very large drop,” Chintawongvanich said. “The buying of puts is likely in anticipation of this.”