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Euro bears have wiped out the last 3-4 days gains, EURUSD slid -0.10%, EURJPY plunged -0.61%, currently trading 117.802 levels. Our shorts in EURJPY have been activated and functioning as desired. Covid-19 was the factor that triggered the repricing of FX volatilities, after several years spent in a semi-lethargic state, with all-time lows reached just a couple of months back. With the rebound in equity indices and with FX vols taking a leg lower investors are asking about opportunities in the FX vol space for fading elevated risk premia but without taking excessive risk. One such opportunity is binary ranges that importantly have defined downside thus allow fading elevated vol premia while granting attractive risk/reward profiles.
EURJPY tops the list of the liquid pairs that offer ex-ante risk/reward metrics in particular thanks to the sharp rebound in implied vols as spot remained in a tight 5% range over the past 10 months. Also, while in general binary ranges are long smile convexity, the move in EURJPY and other JPY- crosses butterflies has been more contained than for instance USD pairs, offering an attractive entry point from this angle as well. A 20% TV binary range (i.e., a trade with a maximum leverage of 5:1 if barriers are not touched till expiry) looks attractive. We choose the strikes slightly asymmetrically in order to grant some margin in case of extended EUR weakness (refer above chart).
Hence, we recommend buying 3M EURJPY binary range, barriers at 112/121.5 at EUR 17.9%/20.9% indic (spot reference: 117.866).
Alternatively, we advocated shorts in EURJPY via ITM put options and also shorts in futures contracts of mid-month tenors with a view to arresting potential dips, since further price dips are foreseen we would like to uphold the same strategy. Courtesy: JPM
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