EURUSD higher trade construction

14 February 2022

We look at how the SynOption’s Optimus FX Options platform provides tools to structure a EURUSD higher trade given the structural USD bearishness of many market participants.

 

Trade Idea

Spot ref 1.1350

  1. Buy the 3m 1.1525-1.1825 call spread in 1×1: EUR 59bp
  2. Buy the 3m 1.1525-1.1825 call spread in 1×1.5: EUR 45bp

Vol Analysis

Term Structure

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

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.

Historical

Despite all the moves higher, the vols still seem to be performing on a historical basis.

Against 1m atm

Against 3m atm

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.

3 month vol smile

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 summarize

  1. 3 month looks like an attractive enough point
  2. The 35d call point is the cheapest point, and offers some value against selling lower delta topside options
  3. The risk reward of selling downside options is not great over elections, hence we do not want to look at seagulls

Trade evaluation

To us, the following 4 trades that we should evaluate for EURUSD higher are:

Spot ref 1.1350

  1. Buy the 3m 1.1525 call- Buy the cheapest point on the curve if the view is that the move upward could be large. Vols are realizing even now
  2. Buy the 3m 1.1525-1.1825 call spread in 1×1: but the cheapest point on the curve, sell the expensive point. Reduce vol exposure as spot moves high. Net long vol but get shorter as spot moves up
  3. Buy the 3m 1.1525-1.1825 call spread in 1×1.5. Net flattish vol. lower premium and moves away from vega quickly
  4. Buy the 3m 1.1525-1.1825 call spread in 1×2- shorter vol. lower premium

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
Delta 35% 22% 15% 8%
Vega 0.18% 0.08% 0.02% -0.03%

Short vega above

 – 1.16 1.1450 1.1225

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.

 

Conclusion

EURUSD higher expressions:

Spot ref 1.1350

  1. Buy the 3m 1.1525-1.1825 call spread in 1×1: EUR 59bp
  2. Buy the 3m 1.1525-1.1825 call spread in 1×1.5: EUR 45bp

Contact Us

If you would like to use the SynOption for your own idea construction, please contact [email protected] to set up a demo or start onboarding. Synoption provides market analytics and trade execution platform called Optimus.

All tools and analytics in the blog above are available on the Optimus platform.

Disclaimer

This document does not express the views of SynOption or any of its representatives and is not meant to be financial advice. The purpose of this document is to highlight how to use Optimus platform for construction of trade ideas based on client views. SynOption does not intend to induce any person to buy, sell or hold a particular investment product or a class of investment products. The information is meant purely for informational purposes and should not be relied upon as financial advice. SynOption will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.