FX Quant Strategy provides a quantitative overview of the currency market, including several valuation tools and monitors, focusing on the FX option market.
This week we recommend two FX option trades:
- Sell 3M EUR/USD straddle strike 1.0500
- Sell 1M EUR/CHF put strike 1.0500
According to our models implied volatility trades in neutral territory in most of the Scandi crosses with the exception of the long end of EUR/SEK and USD/SEK, which look expensive.
Among the major crosses, EUR/GBP and GBP/USD volatility is expensive across the curve reflecting the UK election risk.
The front end of the EUR/CHF volatility curve is expensive, which in combination with an oversold spot signal makes it attractive to sell short-dated EUR/CHF put options. This also fits well with our fundamental view calling for a gradual increase in EUR/CHF towards 1.10 in 12 months.
EUR/USD volatility is expensive at the three-month tenor and also at the one-year segment and beyond. We like to express our volatility view through a three-month short straddle position. While EUR/USD is significantly oversold according to our short term financial models, we look for additional downside in the cross from a fundamental point of view. Hence, we prefer to skew the straddle to the downside, thereby also benefiting from the negative risk reversal.
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