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EQDerivatives: "Strategists Eye Dispersion As French Election Nears"

Release date: 19 Apr 2017 | Eurex Group

EQDerivatives: "Strategists Eye Dispersion As French Election Nears"

Article by Georgia Reynolds, EMEA Reporter

This article first appeared in EQDerivatives' subscription Commentary & News service.

Dispersion trades on the EuroSTOXX 50 Volatility Index and France’s CAC 40 are being touted thanks to the effect the upcoming French Election is having on index volatility.

Peng Cheng, strategist at JPMorgan in London, told EQDerivatives the VSTOXX term structure was inverted, with April outperforming May. “There are opportunities that are arise because of that so for example the dispersion on EUROSTOXX 50 and CAC looks attractive because people buy protection and they buy the index single stock so that has pushed up the index volatility vs. single stock volatility, so dispersion looks attractive,” he said.

The French presidential election on April 23 may turn into a four-way contest as the far left Unsubmissive France presidential candidate, Jean-Luc Melenchon, unexpectedly surged in the polls recently. Both Melenchon and far right candidate Marine Le Pen want a referendum on the country’s membership in the E.U. The CAC, meanwhile, has been underperforming Germany’s DAX since the start of the year, suggesting investors are becoming increasingly nervous about the election outcome.

Pointing to Q1 earnings, Cheng said realized correlation is expected to decline and realized dispersion should pick up. From a hedging perspective, Cheng said buying put spreads for protection on the SX5E and the DAX at either a six-month maturity or a one-year maturity, could be ideal. This is because a high level of volatility is priced into the short term (1 month,) but nothing is priced into six-month or one year maturity, according to Cheng. He suggests put spreads as he views deep downside protection as overvalued, skew is steep and investors are still in underweight Eurozone equities.

Georgia Reynolds is a reporter at EMEA at EQDerivatives, based in London.
A recent graduate from City University London, Georgia has been studying and producing print and multimedia journalism for five years.