OPTIONS - Euro debt vols seen regrouping after fall . [START_ENT] LONDON [END_ENT] 1996-08-23  Implied volatility of European bond and interest rate options should stabilise around current levels until early next week after falling before and after this week 's German-led cut in interest rates , traders said .  " Volatility has come off a lot .  We 're looking for it to stabilise now , " said one Euromark options trader at a U.S. bank .  A trader at a Japanese bank said Euromark volatility now stood at 14.00 for September contract , 16.75 for December , 19.50 for March and 21.25 for June .  This compared with midweek levels , before the welter of interest rate cuts , of 18.50 for September , 20.00 for December , 22.00 for March and 23.5 for June , he said .  At 1347 GMT , December Euromark futures were trading at 96.78 , two basis points down on the day .  He said the sell-off in June vols might have been overdone , which could offer value at current levels .  He said caps and floors would be well bid after the round of interest rate cuts due to the fact these rates should stay low at the short end .  The size of the Bundesbank 's repo rate cut , to 3.00 percent from 3.30 percent , took markets by surprise .  " Volatility has a bid to it -- longer-dated volatility more than short-dated because the event people were buying for has passed and now perhaps people will sell some short dated vol and buy some long dated vol , " he said .  " Long dated volatility has been low this year , so it is still at levels which are not historically high .  " It is not a dangerous level to own vol. You are not going to lose a lot and you could make quite a bit . "  He said volatility levels should be stable until markets reassess the situation after a long weekend in Britain .  Paribas Capital Markets OTC options specialist Robert Coughlan said that if volatility continued lower for the rest of Friday in over-the-counter 10-year Bunds , it should be higher next Tuesday .  He said the absence on holiday of many market makers was a main factor behind falls this week in volatility in high-yielding markets such as Italy , Spain and Sweden .  Coughlan said the market had more downside than upside potential , but a fall was not likely to be of significant size .  " I recommend people sell strangles in a number of markets -- in Germany and France in particular .  " With high-yielding markets Italy will be a lot more vulnerable in September on economic and political fronts , so I would use current the low level of vol to buy options .  " So sell options on Bunds and France to enhance yield and buy options on Italy , " Coughlan said ..  -- Stephen Nisbet , International Bonds +44 171 542 6320
London