Stock market rally after Referendum? Evidence from the Options Market.

FTSE 100 Index options are a excellent tool for investors to benefit from/protect against large scale UK equity market moves.  Specifically, investors can use puts to protect against a decline in stocks after the OUT vote, and calls to reap the benefits of a rally after a REMAIN vote.

I investigate the extend of these two investment plays by assessing the implied volatility skew of the FTSE 100 Index.  Specifically, I assess the difference between 5% out of the money puts and calls for the at one month expiry.  Below I have graphed this spread for the past 2 years.

ImpliedVol1

We can see that the spread between bearish and bullish bets in the options market is at its highest in 2 years.  After a market fall, bearish purchases of puts are frequently met by the buying of calls on speculation that the negative sentiment is overdone.  We do not see this here.  The options markets are suggesting that investors are protecting themselves against a potential drop but few investors are trying to benefit from the potential for a rally.

So perhaps a rally in the FTSE 100 stocks will prove illusory after the referendum.