While U.S. equities continue to dither, things are getting frisky across the pond. Indeed, risk is on the rise in Europe-based ETFs. To analyze, look no further than FEZ which is Europe’s counterpart to the Dow Jones Industrial Average. It includes fifty large-cap stocks from 11 Eurozone countries.

Year-to-date foreign stocks have been beating the U.S. FEZ is up 7.4% while the S&P 500 is up 5.2%. But it’s not the price performance of FEZ that I find interesting, no. It’s the perception of risk, otherwise known as implied volatility. As displayed in the accompanying chart, we haven’t seen this much fear in FEZ since last year’s Brexit vote.

And you know what that means. Option premiums have been fattened for the slaughter. Prices are juiced, ripe for the selling -especially if you don’t think FEZ is going to bust a monster move over the next month. More on trade structure in a second.

I suspect you’re wondering why risk is priced so high in Europe right now. As I was about to research the reasoning, my inner technician barked, “Hands off the keyboard, son. You’re a chart reader, not some cockamamie TV pundit. Since when do you care why something is happening? Use this as an opportunity to teach the masses they can use market action to learn all they need to know, ya ingrate!”

But of course!

Listen up. I believe there are elections or some such coming up over there, but I must admit I don’t know the details. Here’s But here’s why it doesn’t matter. First, the market is mostly efficient. Like usual it will price the risk of whatever the event is before it happens. Second, fear is almost always overblown. Odds are, just like in the Brexit episode, options on FEZ will get a bit too fat. That is, too expensive. So selling them should provide an edge. Third, the date of this expected event is identifiable looking at option pricing. All you must do is look at the implied volatility accompanying each expiration cycle. Usually, you’ll see a bump in IV on the option expiring right after the event.  It’s actually a bit tricky to see with FEZ options right now, but the option cycles that expire the first three weeks of May have the highest implied volatility, so whatever the event is, it’s expected to occur sometime before the third Friday in March.

Now, how might a trader take advantage of this situation? Well, there are a few different ways you could do it. For illustration and education purposes only let’s walk through a short strangle. If you don’t want to lean bullish or bearish into FEZ over the next month, you could enter a short strangle. This delta neutral strategy consists of selling an OTM call and an OTM put simultaneously. Since implied volatility is pumped up, you can go much further OTM than is normal. And that means we can create a mighty wide profit range.

With FEZ at $35.75, you could sell the May 38 call and the May 33 put for a net credit of 90 cents. Provided the ETF sits between $33 and $38 at expiration you will capture the maximum reward of 90 cents. Your upper breakeven is $38.90, and your lower breakeven is $32.10. If the stock is above or below either level at expiration, you will begin to lose.

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