European Options to Decline on Stimulus Packages, Barclays Says

By Gareth Gore

Nov. 25 (Bloomberg) -- European option prices will decline by about a quarter over the next year as government efforts to stimulate the slowing global economy reduce uncertainty and diminish deflationary concerns, according to Barclays Capital.

The cost of protecting European stocks against further stock-market declines is currently “overpriced” after rising to a four-year high last week as markets plunged on the outlook for the U.S. auto industry and growing deflationary pressure, the brokerage said in a note dated yesterday.

One-year implied volatility on the Dow Jones Euro Stoxx 50 Index, which measures the cost of buying options on the euro region’s biggest companies, surged to 49.6 last week, the highest in at least four years. That is likely to drop to the “mid-to- late 30s” over the next 12 months, Barclays said.

“Given the unprecedented level and speed of global government support for financial (and potentially other) institutions, the fear factor that is probably also keeping implieds elevated could subside in the coming months,” London- based derivatives analyst Abhinandan Deb wrote in the note.

Governments worldwide are introducing stimulus packages as they seek to boost their ailing economies. The U.K. yesterday announced plans to cut sales taxes and double the country’s national debt as it seeks to spend itself out of recession. Germany, Europe’s biggest economy, also agreed on a stimulus package for the country earlier his month aimed at unlocking 50 billion euros ($64.5 billion) in investment.

In the U.S., automakers have been lobbying Congress for $25 billion in aid to stave off a cash shortage by year-end. Lawmakers have put off until December a vote on the bailout.

The VStoxx Index, which gauges the price paid for options on Euro Stoxx 50 stocks, has surged to a level three times higher than it was a year ago after stock swings increased. Options are derivatives, or securities that derive their value from an underlying asset, and can be used to protect against a decline or to speculate on the future value of an asset.

“We are not saying here that volatility will decline to pre- or even late-2007 levels,” Deb said in the note. “Just that it is unlikely to be sustained at what is currently being priced over the next year.”

To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net