Sell SXEP put spreads, buy SX5E put spreads (delta neutral)
Whilst working on our last note, Oil: slippy upside, from 28 November, we noticed that skew was noticeably flat in STOXX Oil & Gas (SXEP) compared with EuroSTOXX 50. Apparently the market has seen the relative value in this sector and is buying upside. We can use this skew to our advantage to set up a trade that receives a net premium up front, which is retained if both SXEP and SX5E rise from here or both fall below the lower strikes. Within the strikes, P&L is the net premium plus the difference in performance of SXEP over SX5E.
This trade needs to be set up carefully: the correct ratio of contracts must be traded. Please click into the note for specifics and indicative pricing.