U.S. hedge funds and prop desks are increasingly selling straddles on Euro STOXX 50 realized variance. High trading volumes and liquidity on the Standard & Poor's 500, where the strategy began last year, have pushed straddle prices on that index below the Euro STOXX, and sellers now can make more money on the Euorpean play than the S&P.
Traders said mid-market levels are about 100,000 vega and pay about 4.1 volatility points on the Euro STOXX, compared with 3.5 vol points on the S&P. Straddles on realized variance are directionally neutral, but allow investors to express the view that future realized volatility will be low and range-bound.
One dealer last week recommended selling a Euro STOXX December 15.85% strike straddle on realized variance for 4.3 vol points, with effective break-evens at 10.7% on the downside and 19.7% on the upside. This should protect investors against the impact of shock moves, he noted. Three-month Euro STOXX implied volatility was at 15% last Wednesday.
