Trade Ideas - Premium

15 - June - 2020 09:38 AM PST
MXN Peso Calendar Spread
Expiry June 29th

At expiration the MXN was at 23.11
We were assigned on our short 22.60 MXN Put for a net cost of 2.20%
At the same time we sold the now two-week 22.60 Put at 3.04% of face
The net gain is 0.84%
The gross gain is 0.84%/0.63% or 133%
As a follow up to this weeks Report we would look to do the following

Sell Two Week 22.60 MXN Peso Puts @ 22.38 vol
Buy One Month 22.60 MNX Peso Puts @ 19.41 vol

Based on Spot of 22.45 Spot
Two Week Receive 1.53% of USD
One Month Pay 2.16% of USD
-----------------------------------
Net Cost is 0.63%

Two Week Expiry is 2020-06-29
One Month Expiry is 2020-07-15

Short Dated IV-AV Spreads
Last week in our weekly assessment of short-dated options based on IV-AV spreads, the MXN peso came out as the cheapest in our series in both the two-week and one-month maturities, and thus, as the cheapest overall. That analysis is based on the assumption that the options market was underestimating the degree to which the short-dated option market was making an accurate assessment of the speed of the decline in future actual vol. At the same time last week, the MXN peso stood out with the greatest slope between our short-dated actual measures with the spread in the implieds more or less flat, or in other words following the actuals. Buying MNX peso gamma last week would have been a great trade as both the actuals and the implieds rose on the dollar rebound. If it was only this simple. Unfortunately is not. The spread is a sign of a potential inefficiency that can only be monetized by good delta hedging. That is sometimes referred to as adjustment luck. But the odds are in your more in you favour close to extremes. This week the MXN is showing up as the least expensive in the one-month maturity, but not the two weeks. Given the slope of the short dates, this might be a time to consider a two-week vs. one-month spread trade. The same idea might also apply to EURCHF which as you can see from the chart above suggests that two-week EURCHF is registering as cheap but the one month is showing up as pricey. That might prove a similar opportunity. GBPCAD might prove a similar trade with the spread between the pricing of two-week GBP CAD options vs. the one month. CADJPY options are in our view overpriced vs. USDJPY, and this is particularly so in the three-month maturity with the current spread between CADJPY and USDJPY close to 4 vols over.
Slope of the Short Dated Actual & Implieds
The above table measures the slope of the short-dated actual vols and the implied vols over similar time horizons. The more negative number the faster the short-dated actuals are downward sloping. The more positive number the more upward sloping. The only FX pair that shows an upward sloping AV indicator is EURCHF. In this case, the options market is also in alignment with a similar positive slope in the short dates. The MXN shows up again with the highest negative slope reading in the AV measure but at the same time with the highest positive slope in the implied readings. This is another reason to consider a short-dated calendar spread. And, although not as extreme, the same can be said for GBPCAD.
AUD hourly charts show a clear double-top pattern but while the spot is well off the highs just over 70cents we are still holding the hourly trend line going back to the March lows.
Like AUD, CAD is well off the USD lows and actual vols are moving higher. CAD can still be in a consolidation pattern as long as we can hold below 1.3850. Our contention that the USD was likely to hold 75 cents or 1.3300 proved correct, but we are not yet convinced that the new USD rally has begun, but rather believe the price action will likely hold in a 1.3350-1.3850 new range.
Two weeks and six-week EURGBP actuals are starting to flatten out while the EURGBP cross is now clearly in a channel formation.
The momentum divergence in EURGBP is no longer appears as the momentum indicator turns back below par.
The channel pattern can easily be seen in the chart above. At the same time, the dispersion indicator is falling. The market seems to be sitting on its knees ahead of the June 30 deadline in the Brexit negotiations. Does this make sense?
While EURGBP three-month implied vols are not a bargain by our percentile ranking indicators, they are on a comparative basis the least expensive options in our database for that particular maturity. The chart also shows the wide gap between the EURGBP implied and actual vols, and the clear indication that EURGBP actuals are starting to decline. Given the proximity, to the end of June deadline, this does not make a great deal of sense. The market may be experiencing a degree of Brexit fatigue in the assumption that the UK government will devise some sort of scheme to push the Brexit can down the road.
GBP has bounced off the trendline you can see in the chart above while daily dispersion remains bid. A similar picture is found in the hourly chart with the break of the double top and then correction back below it. It looks very much as if GBP will struggle above 1.27 in the near term.
Three-month GBPUSD options are not as cheap according to our models as EURGBP, but they are showing up as the second least pricey three-month options in our database.
While on the subject of chart patterns, GBPJPY is showing clear signs of an H-S-H formation and the implication is negative. At the same time, you can see clearly that GBPJPY actuals seem to have found a bottom.
Research Director