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FxWirePro: Switch trades - Own buzzing USD calls against CHF puts

Owning USD calls/CHF puts or USDCHF risk reversals as long USD plays:

Unwind long EURCHF outright and rotate into long USDCHF via a risk reversal, which in conjunction with a pre-existing spot long in USDJPY, positions the portfolio for an ongoing improvement in the US economy.

Rotate long EURCHF into long USDCHF via risk reversal; keep EURUSD call spread, the much-awaited ECB meeting was modestly dovish and with it, Draghi was able to deliver euro weakening alongside a QE “taper” announcement for the second time in a year.

It is stated that USDCHF is one of the only two USD pairs (the other being USDJPY) where owning USD calls has been profitable on a delta-hedged basis since they earn smile theta along a risk-reversal that is bid for USD puts to reflect a premium for a 2015 franc de-peg-like SNB tail event.

In addition, long USDCHF directionally is a positive carry proposition, hence risk-reversals without delta-hedges lean long USD while earning both time decay and forward points.

The RV edge is that risk reversals are depressed via-a-vis ATM vols, which are themselves historically cheap relative to carry in forwards (refer above chart).

A 15’Dec17 (post-December FOMC) 1.01 / 0.98 risk-reversal costs 15bp premium (spot ref. 1.0008), has a very decent spot-to-strike distance ratio of the call and put legs of 1:2.5 and suffers negligible bleed till the final two weeks of its life.

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