European Market Analysis
We are seeing a clear split in European markets that presents an opportunity. The German DAX is lagging, likely due to recent PMI data from late July 2025 showing a continued slump in manufacturing, while France and Italy are pushing higher. This suggests a pairs trade, perhaps by buying CAC 40 call options while simultaneously buying puts on the DAX to play the divergence.
In the United States, the rally is broad and confidence is growing, especially with the Russell 2000 small caps surging over 2%. This move was fueled by the early August 2025 CPI report, which came in at a manageable 2.8%, easing concerns about upcoming central bank decisions. We should consider buying call options on the S&P 500 or Russell 2000 to ride this risk-on sentiment through the end of the month.
Volatility and Hedge Strategy
Volatility is something we need to watch closely as we head into the historically turbulent month of September. The CBOE Volatility Index (VIX) has been hovering near 14, which is relatively low compared to the spikes we saw during the 2024 election cycle. Buying VIX futures or long-dated call options could be a cheap way to hedge against an autumn market surprise.
Given the strong run-up in U.S. indices, with the Dow pushing past 44,000, prudence is key. We should look at layering in some downside protection. Buying protective puts on major indices like the SPX for the fourth quarter can lock in the substantial gains we’ve seen this year.
