Implied volatility on the EuroSTOXX 50 index , known as VSTOXX, has stabilised after wild swings earlier this year, prompting Deutsche Bank to look at options that would profit if the range-trading continues.
The VSTOXX has been stuck in the 19 to 24 percent range for the past month, taking 30-day close-to-close volatility to one of its lowest levels this year.
"Over the past three months VSTOXX spot index traded 95 percent of the times between 20 and 30. We see this trend as likely to continue," derivatives strategists at Deutsche write.
"On the one hand we do not anticipate a massive spike in implied volatility in the near-term following Mario Draghi's announcement to support government bond markets in August ... We also expect the VSTOXX to continue to trade at a wide premium to the VIX , and to not fall far below the 20 percent level, as long as no long-term solution to structural issues in many European countries is in sight."
They recommend buying one December 2012 put with a strike of 23 and selling two 21 puts with the same maturity - a strategy which would benefit from a modest fall in VSTOXX.
Conversely, those wanting exposure to a modest pick up in implied volatility could use a long November 2012 call spread with 27.5 and 32.5 strikes, whilst partly offsetting the cost by selling a put with a 20 strike for the same expiry.
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Keywords: MARKETS EUROPE STOCKSNEWS