European equity investors last week sold short-dated single-stock and index puts to earn premium, believing that the market is about to turn a corner. Rachid Bouzouba, head of world book trading and exotics for equity derivatives at Credit Lyonnais in London, said investors have been heartened by the rising U.S. equity markets, adding that his technical analysis shows the Nasdaq's rally last week is not just a short-term blip.
Thomas Luthardt, equity derivatives trader at Commerzbank in Frankfurt, said investors last week entered over-the-counter put spreads on the DAX to earn premium if the market has bottomed out. In a typical transaction they would buy an-at-the-money put and sell a put struck around 5,200-5,800, both maturing in June. The DAX closed Wednesday at 5,951.16.
One London-based trader said he saw investors selling knock-out puts. The puts are usually on shares of blue chip companies, which are considered more likely than tech companies to rebound in a recession. The trader said a common trade was selling a three-month put on the telecom company Alcatel struck at 100%-105% with a knock-out set 10%-15% below the share price, which would earn the investor 3%-4% premium.
Credit Lyonnais' Bouzouba said that clients last week sold puts on shares of Vodafone Group. In a typical transaction an investor would sell a one-year put struck at GBP2 (USD2.87) with a knock-in at GBP1.60. Such a trade would generate 6%-7% premium, compared to 15%-16% for its plain vanilla, at-the-money counterpart. However, the plain vanilla call is far more likely to be exercised. Vodafone Group shares were at GBP2.19 on Wednesday's close.
