Glance over OTC:

1M lacklustre IVs uphold the significance of USDCHF long put butterfly spread:

ATM implied volatilities are not rising considerably, still below 9% (to be precise 7.45% for 1m expiries and 8.55% for 3M expiries). Well, if you have short positions in option and IVs are shrinking away, bingo..!! It's a conducive environment for option writers.

Hence, we reckon the long put butterfly spread is best suitable in such scenarios on speculative grounds that carry the limited returns and the limited risk.

Three distinctive strikes are involved in this spread and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.

The execution: Buy (1%) 1m in the money put option, short 2 lots of 2w at the money put options, simultaneously; buy one more (1%) 1m out of the money put option.

The maximum return for the long put butterfly is achievable when the GBPNZD spot remains unchanged as stated in above range at expiration. At this price, only the highest striking put expires in the money.

This strategy is typically executed when the options trader thinks that the underlying spot FX would not spike or drop much dramatically on expiration and for the cost advantage.

While, risk reversals have also been in sync with IVs and spot FX movements, these numbers also have been bearish neutral for next 1 month but mounting hedging in 3m tenors.

We stay short EURCHF in cash and add downside in USDCHF through a diagonal debit put spread.

Our choice of a put spread is motivated by: 1) the French election calendar should prevent USD/Europe from running away ahead of the second-round presidential runoff on May 7 and the Assembly elections on June 11 and 18, and 2) digitals are reasonably priced for downside in USDCHF (refer above chart). The digital profile can be replicated with a vanilla spread.

Buy a 1m3m USDCHF debit put spread (with strikes of 1.0225 – 0.9515) (at spot reference 1.0050).

We encourage shorts EURCHF in spot FX as IVs for this pair is conducive for optionality, so, go short in debit spreads.