Compared to last year’s lows the euro is trading at quite elevated levels. However, the important 1.1000 resistance zone has held so far. On the other hand, the downside is well supported above the 1.0635 mark. This narrow 1.0600/1.1000 trading range of the last four months is of course also evident in the FX options market. In this respect, today we take another look at the EURUSD implied volatilities, which have once again fallen significantly compared to the last reporting date. After all, this opens up favorable hedging opportunities for players with real dollar needs or trading opportunities for active protagonists who have no appetite for delta 1 risk.
(source: cme group, own representation)
The upper table shows quotes of impl Vols at 07:10 NY time. These impl Vols are almost at pre-crisis levels, where interest rates were at zero percent and central banks pumped massive amounts of money into the market. Let everyone decide for themselves whether today's monetary and economic situation is the same. However, I see a good chance of a reassessment of the risk here in the near future. The ATM impl vol markdowns of the last few weeks and the absolute levels achieved are definitely crazy:
In the following break-even analysis, I will replicate a 3 months ATM EURUSD call (hedged) as usual with a tradable retail product. The selected retail product does not perfectly match today's OTC expiries but the deviation is taken into account in the premium, in the forward and in the delta.
3mth EURUSD Call (hedged)
ISIN DE000DW0KCK2 (DZ Bank - not sponsored!)
Expiry 13oct23
Strike 1.1000
Spot ref 1.0898
Fwd rate 1.0951
Prem 1.19 (EUR; 10.000 EUR Notional = 119 EUR prem)
Delta 0.44
Unfortunately, there will be no newsletter for the next two weeks. Tomorrow morning I'm leaving with my family for a camping vacation. Actually, we wanted to leave today, but the weather forecast for the Baltic Sea coast was too bad. Storm with hurricane-like gusts do not get along with tent trailers and campers with pop-up roof.
After all, it is often the case that my vacations correlate positively with periods of higher volatility!
Good luck,
Sebbo