Options update for the Asian opening – what happened in the professional market.
The weight of money seems to be saying that there is an appetite for risk assets and therefore why own options. Just buy and hold the yielding currencies and if you’re a little more adventurous write a call and earn even more.
| Yesterday | Today | Change | |
| 1w | 8.35% | 8.20% | -0.15% |
| 1m | 9.35% | 9.00% | -0.35% |
| 2m | 9.75% | 9.50% | -0.25% |
| 3m | 10.35% | 10.00% | -0.35% |
| 6m | 11.40% | 11.10% | -0.30% |
The AUD volatility curve has made another new low. For example, the 3-month vol has tested 10.0% for the first time since late April (and prior to that, was last lower in July 2008, i.e., pre-Lehmans). This means that the ‘volatility adjusted’ attractions of the Australian dollar as a carry trade are enhanced. We are nevertheless quick to point to out that Australian yield spreads, even when adjusted for this declining volatility, remain consistent with significantly lower levels for the AUD USD rate.
The 1 month 25 delta risk reversal has fallen significantly and now sits at a 1.05% premium for $A puts in from 1.45% yesterday. This exemplifies the almost complete lack of fear in the currency markets right 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 1.0190 – 1.0500 (still 310 pips but 70 pips higher than yesterday’s calculated range).
Expiries: 1.0250, & 1.0300
| Yesterday | Today | Change | |
| 1w | 9.00% | 8.70% | -0.30% |
| 1m | 9.60% | 9.20% | -0.40% |
| 2m | 9.80% | 9.50% | -0.30% |
| 3m | 10.20% | 9.80% | -0.40% |
| 6m | 10.95% | 10.60% | -0.35% |
Option prices remain under pressure despite the realised vol in the short dates suggesting there is value in owning options. It seems the market simply doesn’t have the appetite to withstand the time decay so they are unloading wherever they can.
The one month 25 delta risk reversal has moved in significantly also and now sits at only -0.45% (ie. favouring EUR 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 1.2080 – 1.2470 (back in to390 pips from 420 pips & 15-20 pips higher than yesterday’s calculated range).
Expiries: 1.2250 & 1.2300
| Yesterday | Today | Change | |
| 1w | 10.60% | 10.70% | 0.10% |
| 1m | 11.80% | 11.25% | -0.55% |
| 2m | 12.10% | 11.75% | -0.35% |
| 3m | 12.70% | 12.30% | -0.40% |
| 6m | 13.50% | 13.10% | -0.40% |
The EUR JPY vols took a further hit in Asia yesterday but have since managed to hold their ground. As we pointed out in the European update yesterday, the market may have been hit with some large structured deals which are designed to enhance yield by banking on a range not being broken.
The 25 delta risk reversal has moved in further to -1.50%.
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 94.70 – 98.60 (390 pips which is 5 pips wider than yesterday & 50+ pips lower).
Expiries: 96.00 & 96.75
| Yesterday | Today | Change | |
| 1w | 6.30% | 6.20% | -0.10% |
| 1m | 7.10% | 6.90% | -0.20% |
| 2m | 7.40% | 7.25% | -0.15% |
| 3m | 7.75% | 7.65% | -0.10% |
| 6m | 8.70% | 8.50% | -0.20% |
The selloff in USD JPY options seems to have abated but there still appears to be more sellers than buyers so while bids may not be getting hit, offers are being lowered. As pre yesterday’s comment in the European update, the market right now is suggesting there is an 80% chance the spot won't trade either 75 or 85 in the next three months.
The USD JPY 25 delta risk reversal remains in favour of USD calls by 0.10%
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 77.90 – 79.70 (in to 180 points now and 25+ pips lower than yesterday’s calculation for next Wed).
Expiries: 78.60 & 78.80
| Yesterday | Today | Change | |
| 1w | 7.05% | 6.50% | -0.55% |
| 1m | 7.10% | 6.75% | -0.35% |
| 2m | 7.30% | 7.10% | -0.20% |
| 3m | 7.80% | 7.55% | -0.25% |
| 6m | 8.80% | 8.55% | -0.25% |
Vols in Cable have moved down another notch and while there seems to be plenty of action in the spot market, there is still a strong perception that it is stuck in a broad range.
The 25 delta risk reversal is now sitting at a 0.55% premium for Cable 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 1.5455 – 1.5835 (in to 380 pips from 415 pips and 20+ point higher than yesterday’s range).
Expiries: 1.5600, 1.5640 & 1.5700
| Yesterday | Today | Change | |
| 1w | 5.85% | 5.95% | 0.10% |
| 1m | 6.45% | 6.35% | -0.10% |
| 2m | 6.75% | 6.70% | -0.05% |
| 3m | 7.20% | 7.15% | -0.05% |
| 6m | 8.00% | 7.90% | -0.10% |
Vols are still drifting lower in this cross and that is no real surprise considering the lack of movement in the spot market.
The one month 25 delta risk reversal shows a premium for EUR puts of 0.40%.
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 0.7750 – 0.7940 (190 pips and still almost the identical range to yesterday).
Expiries: 0.7900
