Long NOK/SEK via 1M Risk Reversal
Danske Markets | Mar 14, 2017 12:39AM ET
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 one FX option trade.
- Long NOK/SEK via 1M bullish risk reversal.
Implied volatility before and after the French presidential election has traded lower over the past three weeks and implied volatility up to the one-month tenor generally trades in 'cheapish' territory, with 1M USD/NOK and 1M NZD/USD being outright cheap according to our FX volatility monitor.The market's pricing of the event risk on 8 May has been relatively stable, with one-day implied forward volatility trading around 37.5% in EUR/USD and close to 60% in EUR/JPY (when adjusting for the weekend).Comparing pricing of the event risk with price action seen on the day after the UK's EU referendum (24 June 2016), EUR/JPY volatility in particular still looks cheap as the breakeven range of a one-day delta neutral straddle covers less than 50% of the decline seen in EUR/JPY on 24 June. Hence, clients looking to buy tail risk protection related to the French election should probably consider buying EUR/JPY put spreads, which benefit from the extreme negative risk reversal.
In the Scandies, USD/SEK and NOK/SEK is significantly overbought according to our short-term financial model, while the model can explain most part of the recent move higher in EUR/NOK and USD/NOK, which has been mainly oil driven. Fundamentally, we are bullish on both NOK and SEK and following the recent oil price decline, we see more potential in NOK relative to SEK in the medium term. However, in the near term, NOK remains in the hands of the oil price and, tactically, we prefer a cautious stance on NOK ahead of the Fed. However, in (12 March), we argue that NOK positioning is no longer stretched and is now almost neutral. Moreover, we note that 1M NOK/SEK 25 delta risk reversal has fallen substantially and is borderline cheap, according to our 'skew monitor'. Hence, from a risk/reward perspective, we see value in pursuing a correction higher in NOK/SEK via 1M bullish risk reversal. We enter the strategy at zero cost by buying 1M NOK/SEK call with strike at 1.0625 and selling 1M put strike 1.0360 (indicative prices, spot ref.: 1.0485).
To read the entire report Please click on the pdf File Below
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.