Options update for the European opening – what happened in the professional market.
Last week we were pondering the absence of buyers, now it’s the reverse. Options prices have taken a big jump over the weekend and they have continued to be pushed higher today in Asia & early Europe.
| Yesterdy | Today | Change | |
| 1w | 8.50% | 10.00% | 1.50% |
| 1m | 8.80% | 10.15% | 1.35% |
| 2m | 9.50% | 10.50% | 1.00% |
| 3m | 9.70% | 10.65% | 0.95% |
| 6m | 10.90% | 11.50% | 0.60% |
Liquidity is still an issue in this cross (and most others) so this move higher is somewhat exaggerated by the a few big ticket trades and the lack of supply. Note the curve is nowhere near as steep as it has been for the past week or so.
The 1 month 25 delta risk reversal has moved quickly out to a premium of 1.00% for $A puts from 0.70% on Friday.
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 1.0080 – 1.0450 (370 pips but much lower than the range ew calsulated from next Friday).
Expiries 1.0275 & 1.0300
| Yesterdy | Today | Change | |
| 1w | 8.70% | 10.00% | 1.30% |
| 1m | 8.90% | 10.15% | 1.25% |
| 2m | 9.50% | 10.35% | 0.85% |
| 3m | 9.60% | 10.50% | 0.90% |
| 6m | 10.40% | 11.20% | 0.80% |
Pop goes the barrier at 1.21 and bank go vols and the risk reversal. As we’ve mentioned recently, the market has been impacted by the barrier between 1.22 & 1.21 (with some big ones at 1.20) so vol is sold on approaching the barrier, spot slows down and then, once the weight of funds pushes through the barrier, options are bought and the spot is unloaded.
In terms of steepness, EUR USD 1y 6m spread reached a new multiyear high at 1.3 % on Friday but is now back to 1%.
Flow-wise, I have heard of only buyers..
The one month 25 delta risk reversal is now trading at only a 0.6% premium for 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 1.1885 – 1.2330 (now 445 pips and lot’s lowere than Friday’s calculated range).
Expiries 1.2100, 1.2150 & 1.2175
| Yesterdy | Today | Change | |
| 1w | 10.70% | 11.70% | 1.00% |
| 1m | 10.90% | 12.20% | 1.30% |
| 2m | 11.50% | 12.50% | 1.00% |
| 3m | 11.90% | 12.85% | 0.95% |
| 6m | 12.70% | 13.60% | 0.90% |
The whole curve was bid higher in Asia today as new lows were made in spot. Last week sellers have taken massive hits especially in the 6mth and 1 year area.
The one month 25 delta risk reversal is now -1.05%.
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 92.40 – 96.50 (out to 410 pips and 200 points lower).
Expiries 94.60 & 95.10
| Yesterdy | Today | Change | |
| 1w | 6.00% | 6.80% | 0.80% |
| 1m | 6.60% | 7.40% | 0.80% |
| 2m | 7.20% | 7.75% | 0.55% |
| 3m | 7.40% | 8.00% | 0.60% |
| 6m | 8.30% | 8.90% | 0.60% |
6.6% for one month vol looked too easy to hold and fund so it looked good value especially when compared to EUR JPY vol. Having said that we will only need a few sellers to re-emerge and this cross could easily settle back down near 7%
The one month 25 delta risk reversal remains in favour of $US calls 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 77.05 – 79.05 (back out to 200 pips and 50+ pips lower than the expected range for Friday’s close).
Expiries 78.00, & 78.20 (both chunky)
| Yesterdy | Today | Change | |
| 1w | 6.60% | 7.05% | 0.45% |
| 1m | 6.70% | 7.30% | 0.60% |
| 2m | 7.05% | 7.45% | 0.40% |
| 3m | 7.40% | 7.70% | 0.30% |
| 6m | 8.30% | 8.60% | 0.30% |
Cable vols have not been sought after to the degree the other USD crosses have which is understandable because the spot is still back into its old comfort range. I doubt anyone would be surprised by today’s estimation of the closing range for next Monday.
The one month 25 delta risk reversal is in to -0.35% (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 1.5330 – 1.5700 (370 pips and significantly lower than the range we calculated on Friday).
Expiries 1.5550, 1.5580 & 1.5630
| Yesterdy | Today | Change | |
| 1w | 5.90% | 6.30% | 0.40% |
| 1m | 6.10% | 6.65% | 0.55% |
| 2m | 6.50% | 6.95% | 0.45% |
| 3m | 6.80% | 7.20% | 0.40% |
| 6m | 7.60% | 7.85% | 0.25% |
The market has been quite accurate in this cross because , despite the move to new lows in spot, the vols have really not gapped as some may have expected (compare them to USD JPY which have similar handles).
The 1 month 25d RR is trading very close to its 6 month lows which favours GBP calls EUR puts by only 0.25%.
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 0.7710 - 0.7900 (190 pips and range is lower again).
Expiries 0.7770 & 0.7810
