Goldman Sachs and JPMorgan are pitching opposing trades based on recent falls in European equity volatility. JPMorgan is expecting single-name vol will continue to fall, but Goldman is predicting a rebound. Aldous Birchall, research analyst in quantitative relative value research at JPMorgan in London, said the firm is recommending investors sell volatility on single name stocks, while buying credit protection. Implied volatility typically falls as credit spreads tighten, Birchall explained, but volatility is currently lagging the comparable move in credit spreads.
JPMorgan was recommending investors buy credit-default swaps on Deutsche Telekom while selling equity puts on the name. Birchall said investors can still benefit from this type of strategy, as long as they choose names with sufficient liquidity in single-stock options.
Goldman Sachs, however, is predicting that single stock volatility will be supported, while index volatility will continue to fall. Altaf Kassam, executive director in European equity derivatives and trading research in London, said the firm anticipates DAX implied vol will plummet further because it is still 20% above its two-year average. Conversely, single-stock volatility should rise during the earnings season. To take advantage of this, investors can sell German index implied volatility while buying names with a top-10 weighting in the DAX index.
