EUR/USD portfolio adjustments amid Greece's deadline

We've been advocating this call quite often on the verge of Greece debt issues. EUR gamma is still worth owning heading into a critical weekend of Greek negotiations that could see capital controls unveiled.

EUR/USD vols plunged sharply after the FOMC meeting.

1M ATM declined nearly 3 vols from its intra-week high at one point, rivaling some of the sharpest sell-offs seen in the aftermath of market crashes.

Obviously, a large event (FOMC) rolling off the expiry calendar deserves to take some risk premium out of the vol curve.

1M IVs are low compared to recent realized volatility and especially given risks of Greek capital controls at some point this month that have pushed risk-reversals out to 3-yr wides.

We buy the arguments around Greece being less toxic medium-term macro issue now than in the pre QE era, but do not trust the current liquidity environment to allow smooth sailing in EUR if capital controls are announced.

Owning gamma from current levels therefore strikes us as a very reasonable risk-management proposition; the optical risk reward of doing so on charts may not appear classically one-sided, but a couple of vols of potential downside. 

On hedging front, buy 1M EUR/USD straddles. Owning short-dated FVAs has been a durable source of vol alpha this year; Euro-bloc currencies (EUR, Scandis) currently screen as good 1M1M FVA buys. We propose earning hedged EM vol carry later this summer via short 1M vol swap / long 1M1M FVA packages once Greece settles.

Hence, for those who still have their Euro exposures open, on hedging reasons EUR/USD 1M straddles are a buy before a weekend of emergency Greek negotiations and potential capital controls.