EUR/CHF Option Pricing Looks Attractive‏

This week our model indicators suggest that both EUR/JPY and USD/JPY continue to look oversold. However, the JPY sell-off is beginning to see support from relative rates and is therefore gradually looking more sustainable according to our short-term models.

We expect the Bank of Japan (BoJ) to ease monetary policy considerably in 2013 and the JPY to weaken significantly against both the USD and EUR and, even though our models are unable to explain the current misalignments, we would not go against the trend at this time.

Our model indicators also suggest that EUR/CHF option pricing currently looks attractive: 1M risk reversal trades nearly 4 standard deviations above its historical mean and 6-12M EUR/CHF implied volatility looks slightly expensive relative to historical volatility. Hence, we suggest entering a 6M bullish seagull with expiry at 19 June 2013, which is before the June meeting of the SNB. The strategy retains a short volatility position and can be entered at zero cost by selling 6M EUR/CHF 1.20 put, buying 6M EUR/CHF 1.21 call and selling 6M EUR/CHF 1.2550 call (indicative, spot ref.:1.2090).

To Read the Entire Report Please Click on the pdf File Below.