Back
4 Feb 2015
Trading gamma – DB
FXStreet (Barcelona) - Aleksandar Kocic, Research Analyst at Deutsche Bank, comments on the FX vol, and shares the setup for trading gamma.
Key Quotes
“We are currently in a transitional period between two regimes, from interpassive to interactive Central Banks, whose actions are being transmitted primarily through the FX channel. The long period of low volatility is ending by transfer of vol from rates into the FX markets.”
“While currency is at the front lines of this transmission, other assets are reacting to the macro impact of Central Banks activity. This is creating short-term ripples and transient vol spikes across all market sectors.”
“However, the long-term effects should be concentrated in the currency channel and possibly foreign assets, but away from US rates.”
“In response to developments in the last months, vol went up across the board, but FX vol remained the best performer.”
“We believe that currency vol is likely to remain supported while rates gamma could relax once realized vol is stabilized.”
“We would be sellers of rates gamma either outright or in the context of funding a long position in FX or equity vol."
"Sell $100mn 3M10Y 50bp wide strangles, 146c bid.
Breakevens are +/-40bp around the forward. With fwd at 1.90% and spot at 1.875%, this corresponds to 1.5% and 2.3% on 10Y swaps.”
“1X2 straddle/strangle: Buy $100mn 6M10Y straddles vs. sell $200mn 6M10Y 60bp wide strangles costless
The breakevens are +/- 60bp around the forwards at 1.96% (i.e. 1.36%/2.56%). Both trades are net short vol positions. They are vulnerable to excessive repricing in rates, beyond breakevens, in both directions with theoretically unlimited downside”
Key Quotes
“We are currently in a transitional period between two regimes, from interpassive to interactive Central Banks, whose actions are being transmitted primarily through the FX channel. The long period of low volatility is ending by transfer of vol from rates into the FX markets.”
“While currency is at the front lines of this transmission, other assets are reacting to the macro impact of Central Banks activity. This is creating short-term ripples and transient vol spikes across all market sectors.”
“However, the long-term effects should be concentrated in the currency channel and possibly foreign assets, but away from US rates.”
“In response to developments in the last months, vol went up across the board, but FX vol remained the best performer.”
“We believe that currency vol is likely to remain supported while rates gamma could relax once realized vol is stabilized.”
“We would be sellers of rates gamma either outright or in the context of funding a long position in FX or equity vol."
"Sell $100mn 3M10Y 50bp wide strangles, 146c bid.
Breakevens are +/-40bp around the forward. With fwd at 1.90% and spot at 1.875%, this corresponds to 1.5% and 2.3% on 10Y swaps.”
“1X2 straddle/strangle: Buy $100mn 6M10Y straddles vs. sell $200mn 6M10Y 60bp wide strangles costless
The breakevens are +/- 60bp around the forwards at 1.96% (i.e. 1.36%/2.56%). Both trades are net short vol positions. They are vulnerable to excessive repricing in rates, beyond breakevens, in both directions with theoretically unlimited downside”