OPTIONS - Euro debt vols seen regrouping after fall .
LONDON 1996-08-23
Implied volatility of European bond and interest rate options should stabilise around current levels until early next week after falling before and after this week 's German-led cut in interest rates , traders said .
" Volatility has come off a lot .
We 're looking for it to stabilise now , " said one Euromark options trader at a U.S. bank .
A trader at a Japanese bank said Euromark volatility now stood at 14.00 for September contract , 16.75 for December , 19.50 for March and 21.25 for June .
This compared with midweek levels , before the welter of interest rate cuts , of 18.50 for September , 20.00 for December , 22.00 for March and 23.5 for June , he said .
At 1347 GMT , December Euromark futures were trading at 96.78 , two basis points down on the day .
He said the sell-off in June vols might have been overdone , which could offer value at current levels .
He said caps and floors would be well bid after the round of interest rate cuts due to the fact these rates should stay low at the short end .
The size of the Bundesbank 's repo rate cut , to 3.00 percent from 3.30 percent , took markets by surprise .
" Volatility has a bid to it -- longer-dated volatility more than short-dated because the event people were buying for has passed and now perhaps people will sell some short dated vol and buy some long dated vol , " he said .
" Long dated volatility has been low this year , so it is still at levels which are not historically high .
" It is not a dangerous level to own vol. You are not going to lose a lot and you could make quite a bit . "
He said volatility levels should be stable until markets reassess the situation after a long weekend in Britain .
Paribas Capital Markets OTC options specialist Robert Coughlan said that if volatility continued lower for the rest of Friday in over-the-counter 10-year Bunds , it should be higher next Tuesday .
He said the absence on holiday of many market makers was a main factor behind falls this week in volatility in high-yielding markets such as Italy , Spain and Sweden .
Coughlan said the market had more downside than upside potential , but a fall was not likely to be of significant size .
" I recommend people sell strangles in a number of markets -- in Germany and France in particular .
" With high-yielding markets Italy will be a lot more vulnerable in September on economic and political fronts , so I would use current the low level of vol to buy options .
" So sell options on Bunds and France to enhance yield and buy options on Italy , " Coughlan said ..
-- Stephen Nisbet , International Bonds +44 171 542 6320