Daily vols for Europe

Options update for the European opening – what happened in the professional market.

Another particularly quiet session in the options market in Asia, but the tone was much less bearish for option prices in most cases & traders appear to be buying selectively where they see value. The EUR USD spot hit a 2 year low but that still hasn’t impacted the vol curve in any significant way.

AUD USD gamma (short dated options which are affected more by spot move than a change in vol) pushed up this morning on the spot move down through 1.02. Bad employment data (27k jobs lost and 5.2% unemployment rate). After this, the market is pricing in a higher likelihood of interest rate cuts in the future. One month is now back above 10% after weakening below there overnight. China data overnight could prove to be an Aussie mover, as we saw from the violent reaction in spot to the China Interest Rates last week.

More generally, we think that AUD USD vol and skew are cheap at current levels.

There is an expiry at 1.2065 in the EUR AUD which may become a magnet.

The 1 month 25 delta risk reversal is still showing a premium of 1.85% for $A puts.

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 0.9965 – 1.0315 (350 pips, but 60 odd points lower than the range we predicted yesterday for next Wednesday)

Expiries 1.0160, 1.0200 & 1.0230.

EUR USD longer dated vols went slightly bid yesterday (including 5y 12.6% +0.2%) but even when the spot reached a 2 year low, there was not any significant move in vols. In exotics, the majority of interests are still for downside structures in the brokers and among investors. Broken-record I know, but there are barriers everywhere between 1.22-1.20, with 1.20 being by far the level with the biggest one touch risk. All of these are acting as brakes on the spot & short dated options, but if there is enough momentum in the spot to push through them, then expect a big shift up in the front end, which will flatten out a very steep curve.

The one week 25 delta risk reversal is now showing a 0.80% premium for EUR puts down from 0.9% (and 1% on Monday).

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 1.2000 – 1.2440 (out to 440 pips from 435 and 50 pips lower than yesterday’s predicted range for next Wednesday).

Expiries 1.2200, 1.2225, & 1.2230.

Options prices are still hanging in there but they do look susceptible to a move lower if the two constituent spot rates continue to meander about.

The one month 25 delta risk reversal is still at -1.95%.

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 94.60 – 99.10 (450 pips, 10 pips narrower but 50+ pips lower than yesterday’s predicted range).

Expiries 97.00 & 97.25.

The front end had climbed a touch in Europe last night but that all came to a shuddering halt after the BoJ meeting.

The one month 25 delta risk reversal remains in favour of $US calls but only by 0.10% now.

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 78.20 – 80.50 (almost identical to yesterday’s prediction) and one of the lowest ranges we seen in several weeks.

Expiries 78.35, 78.75 and 79.00 (and all rather large).

Even with the spot rate pushing back through 1.5500 and looking to test recent lows the vols in this cross are struggling to move, but they are a touch higher than when Asia came in so there is some hope. The realised vol for this pair has stabilised just under 7% so there is some value in the short dates.

The one month 25 delta risk reversal has moved further in to -0.75% (favouring GBP puts).

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 1.5250 – 1.5660 (410 pips which is 40 wider than yesterday and 50+ pips lower).

Expiries 1.5500 & 1.553.

EUR GBP vols have also stabilized at current levels and do offer good value when compared to the vol in the underlying spot (currently above 7%).

The one month 25 delta risk reversal still favours GBP calls / EUR puts by 0.55%.

If we look at the one week volatility and add the risk reversals & 25 delta butterflies (skew) we can estimate the range within which we expect the spot to close in 7 days time with an 80% confidence level. The range today is 0.7805 – 0.8000 (almost identical to yesterday’s range).

Expiries 0.7900 & 0.8020.