EUR Vol: Pushed higher led by top left

Pushed higher led by top left
Euro implieds pushed higher from the open today with 1m and 2m expiries finishing the session up by 6 to 9 normals. In the underlying, euro fixed income ended the day lower, aided by hawkish remarks from the ECB’s Holzmann calling for four consecutive 50bps of hikes.

“The top left is finishing the session higher than could be expected,” felt one trader with 1m2y up 10.6 normals at 125.4 and back to the highs at the start of the year. Still, Euribors faced resumed selling pressure in the afternoon session and are finishing up to 9bps lower and testing last week’s lows. “Clearly some expected momentum to shift to a rally this week but the market has been quick to take that back,” he added.

More generally, one trader felt the market was too quick to get behind a rebound in fixed income, "We saw hopes that things would rally last Friday but it seems the ECB hawks will be quick to keep market expectations in check. Meanwhile risk assets have been performing quite well," he noted. "As yields start to creep up again and terminal rate expectations get pushed back then it fuels bids in gamma." 

Further out, vega also finished the session with gains as 2y and longer expires closed about 1 to 1.5 normals higher. 

For euro option trades on the SDR see here and for volumes please see here. Note that the Total Derivatives SDR now shows broker/platform information for each trade, where available.

Receiver spreads - Barclays
In latest rates research Barclays recommends buying EUR 2y1y low strike 1X1 receiver spread at ATM-240bps for a medium-term hedge against sharp rate cuts. It writes:

• “The market has been pricing out the probability of large-scale rate cuts in the medium term since the start of the year. However, in the latest ECB minutes, council members highlighted that expected inflation for 2025 is now closer to 2% than previously envisaged. Moreover, the monetary policy transmission lag is estimated to be about two years… we think current market levels offer attractive risk-reward for initiating a medium-term hedge against a turn in data and sharp cuts next year.

  
  

• "2yf 1y is historically the optimal point to position for the next turn in monetary policy during the late stage of a hiking cycle… being long 2yf 1y would have had the best performance over all three cycles and would be the optimal tenor for us to hedge against a shift in monetary policy in this cycle as well.

  
  “Left hand-side implied volatility in EUR looks cheap compared with macro uncertainty and
  realized volatility, especially when we think the heightened delivered vol is unlikely to fade in the near term. Given the cheap vol, buying a low-strike receiver spread offers a cheaper and safer way to be long duration in the current environment of uncertainty and swings…”

New structured issues
For a summary of recent structured issuance, see EUR MTNs.