Swiss Stocks Blindside Traders as Volatility Soars 70%: Options
By Sofia Horta e Costa and Namitha Jagadeesh
If anyone saw Switzerland?s central bank coming, they didn?t do much about it in the options market.
A contract that paid out should the benchmark Swiss Market Index (SMI) drop to 8,150 by today from around 9,200 had no volume for the last week. That changed yesterday, when the Swiss National Bank?s move to abandon its currency peg against the euro sent shock waves through markets. A rout in Swiss equities spurred traders to snap up 4,300 of the puts in a matter of hours, sending the price soaring from a few centimes to more than 15 francs — a jump of about 15,000 percent.
?Nobody saw it coming, primarily because central banks are supposed to signal policy changes,? said Guy Foster, the head of research at Brewin Dolphin Securities Ltd. in London. ?I suspect the SNB did not expect such a violent currency appreciation.?
The Swiss Market Index tumbled for a second day, still reeling from the SNB?s decision to abandon its 1.20 franc-per-euro cap that sent the franc soaring as much as 41 percent against the euro yesterday. The shift may have been an attempt by the SNB to preempt possible pressure on the franc in the event of government bond purchases by the European Central Bank. In a nation that has attracted investors for its stability, the change underscores challenge Swiss policy makers have faced managing a currency popular with investors at times of crisis.
UBS AG, Holcim Ltd. (HOLN) and Swatch Group AG (UHR) were among shares tumbling at least 10 percent, while the VSMI, the measure that tracks volatility expectations for the SMI, is heading for a record 70 percent gain since the SNB move. The VSMI is calculated using options contracts denominated in francs.
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