EUR Vol: Retreat lower; Short gamma caution?
Retreat lower as risk sentiment improves
Euro vols declined by 5-15 normals today as fixed income sold off, swap spreads tightened and banking stocks recovered in a move that began during yesterday’s afternoon session.
“Once the Fed is out of the way, and should we get a few more days with some stability in the front-end and credit, then we should come off a bit further,” felt one trader.
In particular, he felt the top left of the grid could see a few sellers emerge around pieces such as 3m2y, currently marked around 174nvol. “Dollar vol also looks rich and any climbdown there over the next couple of sessions will obviously feed into euro vol,” he pointed out.
Further out, vega declined by 1.5 to 3 normals in sympathy with gamma although one trader said flows had been muted in recent sessions. “When you get these big moves all the focus in on the underlying and managing delta,” he felt. As for structured issuance, “It does seem to have taken a hit over the past week,” referring to a decline in the number of deals hitting the screen.
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.
Short gamma caution - JP Morgan
In its latest rates research published the end of last week strategists at JP Morgan say they remain wary of short gamma positions. The bank writes:
- “At the ECB meeting, the bank decided to abandon its forward violence on rate hikes and instead stressed its data-dependent approach - both incoming economic and financial data. President Lagarde stressed that the financial data encompasses developments in financial markets, pass through of ECB hikes to borrowing costs, and the unfolding of the banking crisis as well.
- “Therefore, we believe that markets remain vulnerable to significant repricing higher of ECB terminal rate expectations and this repricing could be equally violent both in a bullish and bearish move.
- “Against the backdrop of the banking crisis hanging over markets like the Damocles sword, we do not think that markets will now price a significant inflation insurance premium on the curve as had been the case previously. Instead we believe that the market will likely keep ex-ante underpricing the next steps of DM central banks tightening as protection against financial stability issues.
- “Over the short-term, markets are likely to remain jittery and given abysmal liquidity jump risk remains high. Indeed, yields have delivered several sigma moves multiple times over the past few days and the risk of this remains over the near term. With Fed and BoE meetings next week, yields can remain jumpy. This would be a deterrent for short gamma positions.”
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