Implied volatility with up to two weeks maturities have in general increased over the past couple of weeks, and according to the volatility monitor (page 8), the front-end of the volatility curves now looks expensive, when evaluated as a Z-score of historical differences between implied and realized volatility. Our range trade monitor, which measures the ratio between the premium of a sold ATM straddle and a realised spot range, also suggests a few crosses where a short volatility strategy looks attractive (page 11). On a one-week and one-month horizon, a short USD/PLN straddle appears to be the most attractive strategy, according to the monitor. However, Zloty volatility has previously been relatively sensitive to an escalation in the Ukrainian conflict and we would refrain from selling EM volatility at this stage.
Recommendation: sell 1W 1.3800 EUR/USD straddle
The range trade monitor also suggests selling a short one-week EUR/USD straddle. We believe that EUR/USD will continue to be trapped in a narrow range around 1.38 in the near term and for that reason a short straddle strategy looks attractive, in our view, although the rest of the week provides a lot of important US data and not least a FOMC meeting tonight where we expect the Fed to taper another 10bn. However, we doubt that the FOMC meeting will have a significant market impact and hence we recommend selling a one-week 1.3800 EUR/USD straddle for an indicative premium of 90 pips corresponding to 0.65% of EUR notional (spot ref: 1.3800). The strategy expires one day ahead of the ECB meeting next week and is profitable if
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