When the Brexit deal was all but done and most traders and odds-makers had made their conclusions, the voters made their decision. It appears that many of the voters would be interested in changing their tally as the economic impact of their choice was far more wide reaching than expected. It is interesting, however, to analyze the volatility since last Friday and understand how much volatility markets can have and how so many experts can be so wrong. Even George Soros, who got long Gold and Short Stocks before the move thought that Brexit was not happening.
The Table below on the bottom shows the percentage ranges of many futures contracts since the Brexit Vote. The percentage is based on the starting point of the move. The volatility is somewhat staggering despite the extraordinary nature of the event. Almost everyone was caught by surprise and if there was a do-over, like there often was in my childhood, I believe the outcome would be different. I’m not sure if a do-over can be worked out to some degree, and if so, whether the British Pound would recover to the 1.50 level too quickly. Stocks have certainly had a nice recovery in the post “Brexit” climate.
The move provided the second opportunity in recent weeks when the appropriate positions in Option Contracts provided immense returns. The first case, the take-over bid of Microsoft for LinkedIn provided an opportunity for holders of Call Options to participate in a tremendous move to the upside. The open interest of deep in the money calls is staggering when you consider the changes in value that occurred. It provides the landscape for how options priced at a couple of dollars or less can explode when a stock goes from 130 to 190 overnight. In this case, two and three dollar options were worth approximately fifty-five to sixty dollars. The same phenome occurred with out of the money puts in Stock Indices after “Brexit”, although to a lesser degree.
While in the LinkedIn case, the Stock traded almost a third higher after the announcement, the British Pound, Natural Gas, Silver and Sugar have had ranges in excess of 10% since last Friday. They were very volatile markets. The contract with the largest percentage range was VX, (CBOE Volatility Index VIX Futures). It had a low of 16.07 and a high of 27.65 on the 24th. That’s a percentage range of almost 55%. It shows the explosive nature of the VIX and is a reminder to options sellers that limited risk positions, when possible, provide the best opportunity for risk management. As a low priced index with an esoteric format, the VIX is much more susceptible to large percentage moves than a product such as a Stock Index, Commodity or Individual Large Cap Company (although LinkedIn came close).
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