Simple, directional equity volatility options trades are taking off because of the view U.S. equity vol levels have bottomed out and have nowhere to go but up. Traders and strategists said they are seeing growing interest in buying six-month to one-year at-the-money calls on U.S. indices.
"We're seeing fundamentally- or directionally-driven trades from people who see options as a stock substitute, not quantitative arbitrage from people taking a specific view on volatility," one trader said. "The most action we see comes from people playing options from the long side," added another trader, noting that term structure more than a year out is much steeper. "If you're going to see a pickup in vol, you might as well pay less for it."
Traders and strategists said there are no immediate concerns on the horizon, but an increase in mergers and acquisitions, a market rise or unexpected geopolitical events could drive vol up. "Our outlook is that volatility will remain where it is until we see a catalyst that could take it up from current levels," said Emmanuel Baror, chief equity derivatives strategist for the Americas at BNP Paribas in New York. "A good trading idea in the current environment would be to configure a trading strategy to be positioned to benefit from upside volatility."
