US vols lowest since 2012 trade

June 21, 2016

The bullish momentum of the last three weeks culminated in the lowest 10y yield since August 2012 (in the context of QE) on a more-dovish-than-expected Fed and a pick-up in momentum for the Brexit camp.

Despite a slight respite in the bullish momentum later in the week, the probability of a second hike ended the week priced fully only by the first quarter of 2018.

Volatility traded directionally with rates and the referendum polls as the market moved to price an increase in Brexit risk. ATM was a better bid from counterparties, but the real trade appears to be one of ‘buy the rumor, sell the fact’, with some unwinding on pops.

With program sellers on the sidelines, the right side of the grid led the outperformance, adding to the steepening momentum that has prevailed on the grid since the end of May.

Trade recommendation:

In a ‘remain’ scenario for the UK referendum, it makes sense to fade the recent move in right side gamma and play for a re-steepening of the expiry curve. In particular, 1m10y versus 1y10y flattened from a recent high of 22bp to 9bp presently.

We recommend therefore selling 1m10y straddles versus 1y10y, volatility weighted (corresponding to a ratio of roughly 3.2:1), playing for a re-steepening of the expiry curve in 10y tails (the focus of the recent program selling) post-vote.

The position enjoys significant positive carry but requires significant active management. The main risk on the position is a Brexit vote, with potentially unlimited losses, but the repricing of a July Fed hike on a ‘remain’ vote also poses a significant risk for the position.

Publication source
Vinson Financials Ltd information  Vinson Financials Ltd reviews

February 17, 2017
NZD looks to weaken
The New Zealand dollar has found itself under pressure in recent days as the market has started to hedge a little while it waits on the next steps for the US economy...
February 17, 2017
The dynamics of the Dollar
William Dudley, the head of the New York FED, called for a rate hike in the coming months, but only if economic growth, accelerating inflation and low unemployment, will meet the development trajectory of the FED...
February 16, 2017
The Federal Reserve balance sheet shrunk?
The Dollar has cut through a significant resistance level of 101, thus completing the retracement move after rallying to a maximum of a 14-year peak. It was not without the help from the Federal Reserve...

FxPro Rating
Vantage FX Rating
Orbex Rating
OANDA Rating
FIBO Group Rating
Grand Capital Rating

Dragon Options Rating
Porter Finance Rating
Binary Brokerz Rating
TropicalTrade Rating
UKoptions Rating
24option Rating