FxWirePro: EUR/SEK “diagonal credit call spreads” to tackle dovish Riksbank and robust uptrend

We are downgrading the SEK forecast by 1-1.5% to reflect the stubbornly dovish outlook for monetary policy and the unrelenting appetite for carry which has continued to flatten the Swedish yield curve and compress international rate differentials.

The new profile envisages an even more extended period of range trading in EUR/SEK centered in the mid-low 9.30s through the remainder of this year.

Moreover, SEK may gains in short run during crayfish season but we no longer expect EUR/SEK to break the recent lows of 9.1151 (4-months lows) over our one-year forecast horizon – such a test will require a turn in the monetary policy cycle and the Riksbank continues to knock this prospect back into the long grass.

Hence, the major uptrend of EURSEK and the abrupt bear swings could be efficiently tackled by the below option strategy.

The ATM IVs of this pair have been an extremely lower side which is perceived to be beneficial for the call option writers considering the on-going technical trend.

Keeping the above both fundamental factors in mind, it is advisable to go long in 1M (1%) OTM 0.36 delta call while writing 1W (1%) ITM call with positive theta and delta closer to zero (both sides use European style options), the credit call spread option trading strategy is recommended when the underlying spot of EURSEK is anticipated to drop moderately in the near term and spikes up in long term.