The CBOE is the leader in listed Index and Equity options – and every so often there is a geopolitical event that can have reverberations in our financial markets. In just the past handful of years, we have experienced significant moves in volatility (both realized and implied) from elections and referendums, typically stemming from the other side of the Atlantic Ocean.

On Thursday June 23rd, a referendum will be held to decide whether or not Britain should leave the European Union.

Keep in mind that it can be easy, but inappropriate to see causation when there is just a correlation, but there has certainly been a tendency to see volatility well bid into events like the June “Brexit” vote.

Don’t Know Much History…….

Dubai World – November 2009 tried to delay a debt payment, which could have triggered the largest government default since Argentina in 2001. VIX moved from around 22 in late October to a high of 30.80 in November.

Vix Dubai World

Source: Google Finance

The most well-known example is Greece, with their ongoing debt (and restructuring) crisis. In April and May of 2010 it became clear that the government’s debt to GDP ratio was unsustainable. Ratings agencies downgraded their sovereign debt. On May 2, 2010 the Troika (ECB, European Commission, and IMF) launched the first Green bailout (110 million Euro).

Likely wholly unrelated, but the very same week, the U.S. markets experienced what would become known as “The Flash Crash” (May 6, 2010).

Between late April and late May 2010, VIX moved from lows of 15.50 to highs of 48.20 (closing high of 45.79).


Source: Google Finance

In 2011 there was a cascade of events that shook markets across the globe. Portugal, Italy, Ireland, Greece, and Spain (PIIGS). In Q2 of 2011, the SPX suffered an 11% pullback from high to low. After regaining traction, and trading very near 1500, the SPX fell 9% on the heels of the first ever U.S. debt downgrade (Friday - August 5, 2011).

VIX dropped to 17.14 on July 22nd and rose to an intraday and closing high of 48 on August 8th.


Source: Google Finance

2012 was, on the whole a march higher for global equity markets, but they hit speed bumps in April and May when the French elected Socialist party leader, Francois Hollande. Over the same time frame the Greeks held elections with the flashpoint being the imposition of “austerity” measures, which many Greeks disagreed with entirely. There was concern that if the Samaras coalition (New Democracy Party) was defeated, Greece would also leave the European Union and abrogate the Euro and as well as their debt.

Ultimately, the “anti-austerity” party (SYRIZA) and their leader, Alexis Tsipras won considerable parliamentary inroads. Eventually Tsipras became president (2015), but to this point, Greece remains part of the EU.

The SPX dropped about 7.5% over this time frame and VIX moved from lows of 16.01 to highs of 25.14.


Source: Google Finance

In 2015, Greeks held a referendum on whether to accept the terms of their bailout package. The bailout terms were rejected by the majority and forced the resignation of President Samaras. The government then requested a new 3 year bailout and eventually a 53.5 billion Euro package was approved.

Perhaps the market had grown accustomed to the Greek saga because last year the SPX had a very shallow (roughly 4%) selloff from late June to early July. That was followed by a 4+% advance to new all-time highs.


Source: Google Finance

BREXIT: A Primer

  • The European Union (EU) is a partnership (both political and economic) that includes 28 European countries, 19 of which use the “common currency” – The Euro.
  • The British (England, Scotland, Wales, and Northern Ireland) do not use The Euro. They continue to use the British Pound.
  • The EU traces its roots to the end of World War II because it is believed that nations that trade goods and services with one another are less likely to end up at war.
  • David Cameron, Prime Minister of England promised to hold another referendum on EU membership if he won the general election last year.
  • The British electorate held a referendum in 1975 and voted to remain in the EU at that point in time.

The key issues being debated by U.K. Voters include:

  • Billions in charges annually verses what is perceived to be relatively little in return (Brexit).
  • Greater/full border control (Brexit).
  • Reduce number of “migrant” workers (Brexit).
  • Objection to the concept of an “even closer Union” or “united states of Europe” (Brexit).
  • Immigrants are young and eager to work which is the engine for economic growth (Remain in EU).
  • The EU helps fund public services/projects (Remain in EU).
  • Greater security as part of the 28 nation coalition (Remain in EU).
  • Tremendous potential economic uncertainty (Remain in EU).

At present, it appears based on polls/odds makers that the outcome favors remaining in the EU with 5 weeks to go before the vote takes place. The Scottish people appear to be the most firmly in favor of staying in the European Union.

Arguably the most direct way to leverage options to potentially benefit from the Brexit outcome would be utilizing one of the newest Index options at the CBOE.

In late March, the exchange introduced Cash Settled Index options on the FTSE 100 (UKXM). According to the CBOE site, “The FTSE 100 Index (based on UKX) is a market capitalization weighted index of UK-listed blue chip companies. The index comprises the 100 largest blue chip companies listed and traded on the London Stock Exchange.” For more information see:

30 day historical and implied volatility on the FTSE 100 tends to be slightly higher than that of the S&P 500 (SPX).


Source: Bloomberg

The index is trading at 636.57 and has regular (3rd Friday) expirations. If you evaluate the term structure, there is a modest volatility skew in the July cycle options. There is also a fairly pronounced put skew, which is typical of most broad based equity index options.

Alternate vehicles for potential exposure to the Brexit vote may include VIX, RVX, FXE, FXB, or a number of other proxies that could experience a knock-on-effect from the referendum.

FXE is an ETF designed to track the performance of The Euro (Currency) relative to the U.S. Dollar. FXE has options that expire weekly, and as illustrated in the chart below, the options that expire on June 24, 2016 are trading on the highest volatility and most pronounced skew.


Source: LiveVolPro

FXB is also an ETF and it is designed to track the performance of the British Pound relative to the U.S. Dollar. FXB does not have weekly options listed. However, the July cycle options expire after the Brexit referendum and are clearly elevated in terms of volatility and skew vis-à-vis other expiration cycles.


Source: LiveVolPro

VIX options afford direct exposure to broad based Index volatility (30 day anticipated volatility on the SPX). They have weekly options listed and if there is a desire to tailor a trade around the Brexit vote using VIX options, the June 29th weeklys will be listed shortly after the May 25th weeklys expire.

It is worth noting that there is a Federal Open Market Committee meeting which includes a press conference and updated economic projections ahead of the vote in the U.K. (June 14th and 15th).

Over the coming weeks the electorate in the U.K. will have to determine their best options. The implications of that vote could have consequential effects on everything from the S&P 500 to currencies and global volatility. You too have flexibility when it comes to either hedging or speculating given the myriad of markets and options available for trading.