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The flash crash the FX market experienced recently was different to similar episodes of this nature in the past and in some way more intense. From the above diagram, it is observed that the choices of USD put /NOK calls and ATM are associated with the most luring profit profiles, although one could argue that the long USD call / NOK put position (more expensive premium-wise due to the skew) could offer a better protection for offsetting the short-vol leg were risk-off to resume.
Dual digitals can offer an alternative, directional implementation of the same trading theme, by further allowing for a correlation-induced discount if choosing the strikes appropriately. A scatter plot of vol (x-axis) and spot (y-axis) 3M historical returns for AUDUSD displays that, on average, thanks to the skew, declining volatility supports an appreciation of the currency in the spot market.
Therefore, one can consider a strike in the AUDUSD leg to be above the spot value. A similar reasoning could allow considering a strike above spot for USDNOK, where we find potential for the vol to rise modestly. This scenario, which would possibly play out in case of a range-trading market for the US dollar, would allow a significant correlation discount, given that AUDUSD and USDNOK would move in the same direction and the market prices a negative implied correlation on the pair. However, in the trade below, we consider a slightly more conservative choice for the strike of the long USDNOK vol position (1% ITMS).
Trade tips:
A 3M at-expiry dual digital structure (AUDUSD > 2% OTMS, USDNOK > 1% ITMS) costs 12.8% USD (10.3% mid), allows a 7.8X max leverage and offers 60% discount against the cheapest of the two dual digitals (mid vs mid).
We advocared buying a 3M ATM USDNOK straddle @8.5/8.75 vol indic vs. selling a 3M 25delta AUD put / USD call @8.5/8.7 vol indic, the trade was initiated when AUD was trading at 0.7227 level in vega neutral notional, spot ref USDNOK 8.7502, AUDUSD 0.6956. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly BTC spot index is inching towards 128 levels (which is bullish), while hourly USD spot index was at 37 (mildly bullish) while articulating (at 11:25 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
