EUR Vol: Upper left leads decline

Computer lines code 30 Jan 2023
The upper left of the grid led a decline in implieds today.

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  • Upper left leads decline
  • Bearish on long-tail gamma - JP Morgan
  • New structured issues

    Upper left leads decline
    The upper left-hand side of the grid led a sharp decline today as the risk outlook continued to stabilise. In the underlying, the Bund sold off over a point, swap spreads tightened and banking stocks edged higher.

    The highest point on the grid 1m2y saw the biggest decline of 8 normals to 186.7. Other pieces around 1y1y declined by about 3.5 normals. Meanwhile, today’s move in euros follows a similar move in dollar vol yesterday where some pieces in the upper left fell as much as 20-plus normals, see here.

    Moving to the right-hand side of the euro vol grid, and 5y and 10y euro gamma expiries declined by 3 to 4 normals. For instance, 3m10y has fallen 3.7 to 121.3.


    Ahead, one trader felt it would take another leg-up in confidence for something like 3m10y to dip below 120, “Most of the move (higher) has been driven by credit risk and the SVB fallout. If things continue to settle down then we could head lower, but the top left may need more convincing (to sell),” he reckoned.

    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.


    Bearish on long-tail gamma - JP Morgan
    Strategists at JP Morgan have a bearish bias on long-end gamma for investors wishing to initiate medium-term strategic short they recommend selling 1y10y delta-hedged straddles as a medium-term trade. The bank writes:

    • “We prefer selling volatility on long tails as opposed to short tails. In our view, uncertainty ground the central bank reaction function will keep volatility in reds and greens (both implied and delivered) relatively elevated over the near-term and the directionality of implieds vs yields choppy.

    • “Implieds on 10y+ tails, on the other hand, exhibit a strong positive directionality to yields and our medium-term bullish duration bias is supportive of short gamma positions in this sector as a medium-term trade.

    • “Of course, the directionality could switch on a re-escalation of the banking crisis and push implieds higher. However, we believe that globally authorities remain vigilant on this and this should gradually assuage investor fears of any contagion.”


    New structured issues

  • Helaba issued EUR 5y NC1 callable due Apr 2028. Coupon pays 3.15% with single call in Apr 2024. Self-led.