FX Quant Strategy provides a quantitative overview of the currency market, including several valuation tools and monitors, focusing on the FX options market.
This week we recommend two FX option trades:
Enter bearish 3M EUR/SEK risk reversal for a premium
Enter bearish 3M GBP/USD seagull
Implied FX volatility
has in general traded higher during August. However the 0-3M tenors in the G10 space still trade in cheap-ish territory according to our volatility valuation model with the exception of USD/JPY which is expensive from the 1M tenor and beyond. At the 1Y tenors, our model still suggests that EUR/USD and USD/SEK implied volatility is low. When using FX options as proxy hedging of global equities, USD/SEK currently offers the best relationship between beta and option price. See FX Edge: Time to buy FX volatility (11 August 2016) for details.
Looking at our FX spot monitor , we currently observe one strong signal, namely EUR/SEK being overbought. We recommend exploiting our model's bearish EUR/SEK signal by entering 3M bearish risk reversal. Given the low level of implied volatility, we recommend entering the risk reversal by selling 3M 9.7500 call and buying 3M at-the-money 9.5500 put at a premium of 850 SEK pips (0.89% of notional, indicative prices, spot ref.: 9.5560)
Our short term financial models also suggest that GBP/USD currently is overvalued. In fact, GBP/USD is currently the most stretched cross trading 1.5 standard deviation above the model's short term fair value estimate of 1.2923 while technical indicators are less stretched (hence the overall neutral score). Fundamentally, we are bearish GBP and we recommend entering short GBP/USD position via 3M bearish seagull at zero cost by buying 3M 1.3245 put and financed by selling 3M 1.3475 call and 3M 1.2850 put (indicative prices, spot ref.: 1.3245). As such, this strategy takes the view that GBP/USD will move towards the lower end of the post Brexit range of 1.2798, while not breaking above the post Brexit high of 1.3481. As one of very few exceptions in the G10 FX volatility space, 3M GBP/USD implied volatility is tilted towards expensive according to our monitor, which is why we prefer the seagull structure.
To read the entire report Please click on the pdf File Below