INVESTMENT FOCUS-Options traders prepare for future European stock market falls
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This summer, did you happen to catch the story of the Reading man who was flattened by a bus? It was all caught on camera click here to watch it. He got smacked, thrown for a loop, and then in true English fashion, dusted himself off, and headed to the pub for a pint.
Over the weekend, the Germans went to the polls, and Euro stoxx listed options trading Merkel did not fare quite as well as the market had hoped. Forming a coalition government will be more complicated, and most importantly, hopes for a move towards a more unified Europe now appear much more difficult.
Suddenly, investors are once again worried about the rise of anti-Euro parties. And yeah, I understand the concerns. And I know the initial reaction might be to sell all European assets, yet I think that is the wrong response.
No one wants it. No one can afford it. And at least on a short-term basis, it is probably the most difficult adjustment for the various global economies. Take the United States. Would raising the overnight Fed Funds rate by 50 basis points hurt the American economy? Probably not nearly as much as the accompanying rise in the US dollar. Going forward, Euro weakness is therefore more important than anything else. You can moan and wail about it being stupid, but how much sense does buying the Yen on North Korean escalations make?
You can fight it, but I would rather take advantage of it. They definitely have a Hotel California air to them, but for a guy like me that trades too much, the illiquidity is sometimes a godsend. It forces me to hold them for the long haul. Usually, most equity options are short euro stoxx listed options trading enough that euro stoxx listed options trading rho sensitivity to interest rates is quite small.
Yup - you read that right! I chose the call. It settled at roughlywhich represents Putting aside option pricing theory for a moment and thinking about this logically, if you asked me whether I would be willing to bet that sometime in the next nine years the Eurostoxx index would be up a lot euro stoxx listed options trading than Here is the interesting part.
Assuming that everything stays the same, if interest rates rise, then the value of the options should also rise. And the amount is not immaterial.
A basis points move in the interest rate adds points to the price of the option. One of the reasons that these long-dated call options are so attractive is that negative European rates are embedded in this price. Think about it for a second. How do you calculate the forward value euro stoxx listed options trading a stock index?
In the old days, interest rates were most often larger than the dividend yield, so forward future contracts would trade at premium to the underlying index. There, interest rates are negative and substantially lower than the dividend yield. That is why the futures curve trades at increasingly discounted levels. If rates were to rise, then the far month futures would have to also rise. I am a huge bear when it comes to European bonds.
German rates are especially ridiculous and represent one of the best trade setups that I have ever seen. Owning long-dated European equity index calls is euro stoxx listed options trading good diversifier. In that case, I hope Euro stoxx listed options trading equities would rip, and maybe I could eventually win on both trades. Either way, I am not fussed about the German election results. Some euro weakness is welcome, and the currency move will be more important than the increased perceived political risk.
Euro stoxx listed options trading what better way to play it than super-long dated Eurostoxx calls? Just remember, you can check in, but you can never check out….
Last week I included a chart of the Household debt to disposable income net of health cost for both Canada and US. Brad Parkes from www. All I can say is that I wish I had thought of that! You can clearly see the US housing bubble. That ends up being a much larger influence than many of the Canadian real estate bears admit. Here is a link to the chart. Toggle navigation by East West Investment Management. This has had a predictable effect on the euro.
And I think some European angst that helps the Euro sell off will be welcome. Just remember, you can check in, but you can never check out… Oh Canada revisited Last week I included a chart of the Household euro stoxx listed options trading to disposable income net of health cost for both Canada and US.