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FX vols underwent through a bi-modal pattern since late February, rising sharply until around March 20th and dropping almost as steadily since then. The rise was associated with the “shock” component linked to the most acute phase of the COVID-19 crisis. Current valuations appear to be benignly pricing the economic follow-up to the health crisis. VXY-G10 pricing is less than 3-vol pts from the mid-February all-time low.
As short-Gamma trades risk large drawdowns, limited-downside implementations are well sought after. Lower pricing of convexity risk after the March spike makes the implementation of the short-Gamma theme via binary ranges appealing (the structures have long exposure to smile convexity).
This is particularly the case for EURCHF and USDTWD which top the list of most appealing 3M range candidates based on the binary range vs the trading range metrics. Political tensions in Europe pose a natural downside risk to the EUR, but the latest price action, boosted by the French-German proposal of a 500$bn recovery fund, supports a potentially more benign outlook. EURCHF continuous barrier structures are challenging to come but EURJPY proxy can be used instead.
Trade tips:
Buy a 3M binary range on EURJPY, barriers at 115/121.5, spot ref. 117.22, at EUR 18/22%
Buy a 3M binary range on USDTWD, barriers at 29.7/30.8, spot ref. 30.07, at USD 17/22%. Courtesy: JPM
