Eurostoxx futures are up 0.4% in early European trading, signaling a positive outlook as European stocks aim to finish the week strong. German DAX futures rose by 0.5%, French CAC 40 futures by 0.4%, and UK FTSE futures by 0.3%. This upbeat mood follows a strong day on Wall Street, with US futures also climbing. Tech stocks are driving this rise, as S&P 500 futures show a 0.2% gain.

Opportunity To Sell Volatility

The current positive futures offer a chance to sell volatility, but we advise caution. The market’s upward trend allows traders to earn premiums by selling out-of-the-money put options on indices like the S&P 500. This strategy works well if the market keeps rising or remains steady. This rally is backed by solid data from the United States. The latest Consumer Price Index report shows inflation cooling to 3.3% in May, suggesting a possible economic soft landing. This data encourages risk-taking and boosts the ongoing tech-led rally. However, we must pay close attention to central bankers like Powell. The Federal Reserve now expects only one interest rate cut in 2024, a more cautious approach than the market had anticipated. This indicates that the road ahead may be bumpy, and any surprise inflation data could trigger a quick downturn. In Europe, the situation is a bit different, leading to a possible divergence. While the European Central Bank recently cut rates, Lagarde has been hesitant to promise more cuts due to Eurozone inflation rising to 2.6%. As a result, we see the potential for growth in indices like the DAX and CAC 40 as being more delicate compared to their US counterparts.

Volatility Levels

Volatility levels reflect this calm but fragile state. The VIX index is trading near 13, a historically low level indicating market complacency, making it appealing to sell options. However, history suggests that extended low volatility can result in sudden, sharp spikes, making cheap, long-term protective puts a wise addition to any portfolio. Considering these factors, we recommend a balanced approach in the weeks ahead. Traders should take advantage of the current uptrend with strategies like bull put spreads, which limit risk. At the same time, a small portion of the portfolio should be dedicated to buying long-term downside protection in case central bank policies or economic data surprise the market. Create your live VT Markets account and start trading now.

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