14 February 2022
Spot ref 1.1350
It is no surprise that with the French election coming up, there is a fair amount of premium built into the front end of the curve. The vol term structure is downward sloping.
There has been premium built into the curve, and that can be seen on how the term structure has evolved over the last month.
Risk reversals have also moved quite heavily for puts, demonstrating that the market expects risk-off moves for EUR moving lower and calmer markets if EUR moves higher.
Despite all the moves higher, the vols still seem to be performing on a historical basis.
Given our view on USD weakness is more structural, we would rather structure the trade beyond the immediate event of French elections and structure something towards 3 month options.
As expected, vols have secularly moved higher with the event getting priced in, and one would expect that post election, vols should get repriced lower.
And the curve thus provides interesting points to look at. It seems like the 35d call is the cheapest point on the curve.
To us, the following 4 trades that we should evaluate for EURUSD higher are:
Spot ref 1.1350
Let us evaluate these 4 trades
|3m 35dC||3m CS 1×1||3m CS 1×1.5||3m CS 1X2|
|Premium (in EUR bp)||85||58||45||32|
Short vega above
The chart below shows how the greeks on the strategies change if spot was to move higher today.
The key thing to watch is for vega on a spot move higher. The 35dC obviously keeps long vol which may not be ideal post election. For this reason we eliminate the outright buy of the 35d call.
The 3 call spreads seem like the ideal trade, with client view on the extent to which EURUSD can go being he chief motivator of the structure of the trade. We prefer the 1×1 or 1×1.5 as we are believers that we could see a much bigger market move higher.
Entry point evaluation
Lets look at historic premium pricing of 3 options. The chart shows the price of the option or the strategy if we had entered in any of these trades on a daily basis over the last 6 months.
Premiums on all the strategies are towards the lower end over the last 6 months. The 1×2 (yellow) while at the lower end hasn’t seen a lot of upside either, while the live vanilla option (light blue) seems to be traded in a 50-325bp range with current value close to 86bp.
Overall, entry points for all strategies look attractive from a historical perspective.
EURUSD higher expressions:
Spot ref 1.1350
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