Dip Buyers Stepping In
It seems dip buyers are stepping in after a tricky start to August, with European indices and US futures pointing higher today. This follows a period of choppy trading where gains have been difficult to sustain. We see this as a tentative move, not a strong conviction rally, especially after the recent weak US services data.
This indecisive market action is reflected in options pricing. We’ve seen the VIX, a measure of expected volatility, hovering around 18 this past week, which is notably higher than the calmer periods we had in the second quarter. This elevated premium means it’s more expensive to buy protection, but it also offers better returns for selling it.
For traders who believe this bounce is fragile, buying put spreads on indices like the DAX or S&P 500 could be a cost-effective way to position for another downturn. Looking back at the sharp, unexpected sell-offs we saw in late 2023, being prepared for sudden shifts remains a wise strategy. The higher implied volatility makes outright long puts expensive, so using spreads helps to reduce the upfront cost.
Alternative Trading Strategies
Alternatively, if we believe the market will remain stuck in this range, selling premium is attractive. An iron condor on the Euro Stoxx 50, for instance, would profit from the index staying between two set price points in the coming weeks. This capitalizes on the market’s current lack of a clear direction.
All attention is now shifting to the upcoming inflation reports. The US is expected to release its latest CPI figures next week, which have consistently been the biggest market-moving events over the last two years. A number that is hotter than expected could easily end this morning’s positive sentiment and spark another wave of selling.
