Background
With the backdrop of the bleak vortex macro environment that is known as the Eurozone, we have third quarter GDP out tomorrow. Interestingly enough, German 3Q GDP figures come out about three hours before the blocks numbers. The Germans should probably take the limelight, given the contraction in the 2Q GDP data of -0.20%. Currently consensus is expecting +0.10% quarter on quarter growth in both Germany and the Eurozone.
I think any better than expected number on either 3Q GDP number or to final inflation prints that also fall on the same day, could see a very strong tactical bounce in EURUSD. At the same time, the potential headline, “Germany Falls Into Recession” on the back of two consecutive quarters of negative growth could be enough to take EURUSD through 1.2400 and our most recent 1.2358 lows (Nov 7).
It's worth noting that volatility is not cheap, and this is a more aggressive play on volatility. Yet at the same time, from a structural perspective, that's the direction of where we are going globally, i.e. off globally low yield, inflation and volatility levels.
Look to pick up c. 1 week ATM straddles (long call and put options) with a maturity of Nov 20.
If we get to the Friday print and it's a non-event, one should be able to close it out at around 20-40 basis points (I am taking the total 18 basis points spread on the bid/ask to close the trade and doubling it to get a range).
For those that are happy to hold the options until expiry, you'll pick up FOMC minutes as well as preliminary PMIs numbers next week, which are also potential event-points albeit of lower caliber. You will also (indirectly) pick up 3Q GDP figures from Japan, which is going to be one of the most heavily watched as well as critical data points of the year that are due out on Mon, Nov 17.
Management and risk description
Parameters
Long volatility through straddles, so buying ATM calls and puts.
Entry: EuroDollar ref is 1.2440, mid-vol is 8.85%. ATM straddles. Total cost 131 pips (65pips for the call + 66pips for the put). It's worth noting with volumes being elevated as they are now, you need EURUSD to move above 1.2505 or below 1.2374 for the straddle to start making money.
Stop: Triggered by the events on Friday. Either close out post the event for an estimated 20-40 basis points if it's a non-mover. If you are happy to hold against say a hedge to your port (e.g. if your short volatility or have a very strong risk-on bias), then your loss is the full premium paid.
Target: Triggered by the events on Friday. Hard to call the profit target as this is very dynamic. If the events are market moving, I'd immediately close off the losing leg of the straddle (i.e. recoup some premium) and then either pick levels or a return to target or hold onto it until maturity on the remaining leg.
Time horizon: From 30 hours to one week.
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