Low volatility on the German DAX stock index, in spite of political pundits predicting an extraordinary September general election, is offering speculative accounts a chance to buy cheap options and position for election-related volatility. The VDAX, Deutsche Börse's German volatility index, hovered around the 14.7% mark early last week, while VSTOXX, the Euro STOXX volatility index, was at a similar 14.46% last Tuesday.
Stephen Fulford, managing director and head of European equity flow derivatives sales and research at Dresdner Kleinwort Wasserstein in London, said last Wednesday October 2005 expiry 30 delta puts on the DAX were commanding only a 0.9% premium over Euro STOXX, implying little or no risk premium for the election. An equity derivatives trader agreed, noting the fact the date of the election has not been fixed and opinion polls show no coalition or single party has a majority should lead DAX volatility to trade higher than Euro STOXX. "It's a good buying opportunity," he added. A strategist at a U.S. firm recommended selling option straddles through August and buying September dated straddles to capture any volatility uptick.
