* Investors buying Sept, Oct puts on EuroSTOXX 50 index
* Two-month implied volatility picking up in FX
* MS recommends selling euro/dollar into German election
* Bonds calm for now but sensitive to Italian politics
By Toni Vorobyova and Anirban Nag
LONDON, Aug 7 Europe's financial markets could be in for a stormy September: Some investors are already preparing for turbulence from the German elections and a key U.S. central bank meeting.
So far, a quiet summer with a benign company earnings season in Europe has depressed volatility across markets to multi-month lows. But this has opened up opportunity to put on relatively cheap bets using options for potentially more action in autumn.
Two events in September could produce the turbulence. The big question in markets for months has been when the U.S. Federal Reserve might begin to scale back - or "taper" in the jargon - its monetary stimulus that has supported assets across the globe. The answer may come at a Fed meeting on Sept. 17-18.
Just days later, Germans go to the polls. Although Angela Merkel is expected to remain chancellor, the run-up to the vote has frozen European Union decision-making and kept a lid on potential political flashpoints, for example in Italy.
In between, the quarterly expiry of options on many assets could exacerbate volatility by leaving some investors scrambling for cover as their positions expire.
For good measure, a German court ruling on the legality of the European Central Bank's bond-buying program is due after the elections.
There are early signs that currency and equity markets are starting to prepare. In the past two weeks, investors have put on twice as many negative bets on the EuroSTOXX 50 index of euro zone blue-chips for September as positive ones, based on trading of put and call options - sell and buy instructions - on the Eurex exchange.
"My expectation would be that as you come into these events and they come more to the forefront, you could see short-dated vol(atility) tick up from the low levels," said Pam Finelli, head of European equity derivatives strategy at Deutsche Bank.
Implied volatility on euro zone equities, seen as a crude barometer for risk aversion based on how much investors are willing to pay for options, has fallen some 16 percent in the past month to among the year's lowest levels.
But it has fallen less on the two- and three-month horizon than for the one month, implying expectation of more turbulence in September and October.
"What we've been recommending clients is that if you want to get exposed to the upside, you may as well get it via options, using calls, given that vol is so cheap. It is also a good time to put some bets into year end if you are still fully exposed," said a senior trader at a major investment bank.
In the foreign exchange markets, euro/dollar two-month implied volatilities have picked up and now trade above their six-month lows struck in late July.
"There is some demand for options covering both the (Fed meeting) as well as the German general election," said a chief options trader at an European bank.
He added that risk reversals, a gauge of relative demand for put and call options, showed investors were uncertain which way the exchange rate would head for once the German vote and the Fed meeting were over.
"While investors are betting on more volatility post-Fed meeting) and the German elections, they are not sure about the direction," he said.
The reflects investor uncertainty over whether the Fed will start to unwind its stimulus - to the likely detriment of equities and the benefit of bonds and the dollar - next month and how quick the process might be.
In Germany, investors will want to know whether the new government will take a more or less strict line on troubled euro zone counties and on the tentative political switch in the bloc towards a focus on economic growth rather than austerity.
In equities, Deutsche Bank recommends buying an options structure which will cash in if the EuroSTOXX 50 volatility index is between 22 and 27 on the Sept. 18 expiry - implying an increase of 20 to 48 percent from now.
In currencies Morgan Stanley suggests a direction bet.
"Markets seem to be treating the outcome of the upcoming German general election as a non-event. We disagree and look to sell euro/dollar near the important $1.3420 level," said the firm's European currency strategist Ian Stannard.
In bond markets, investors are particularly sensitive to a potential flare-up of tensions in Italy where lawmakers will decide later in the year whether former Premier Silvio Berlusconi will retain his parliamentary seat after his conviction for tax fraud.
"No one wants to take a short position (in Italian bonds) at the moment. People will probably wait until we are closer to the situation heating up again," Sunrise Brokers head of research Gianluca Ziglio said. (Additional reporting by Emelia Sithole-Matarise, editing by Nigel Stephenson/Jeremy Gaunt)