EUR Vol: Gamma bounce amid profit-taking
Gamma bounce amid profit-taking
The week has begun with euro fixed income staying under pressure as the Bund future lost another 50 ticks and the 10y yield increased by 3.5bps to 2.47%.
Euro implieds were mostly higher, led by shorter-dated expiries such as 1m and 2m. One source suggested the gains could be down to profit-taking. For instance, 1m10y bounced 5 normals to 106.3 having recently made a 2023 low around 101.2.
At the same time, he noted there has been testing of recent ranges in the underlying, such as EUR 10y reaching the 3.10% level earlier during today’s session. “The next target in 10y would be around 3.30%,” he noted.
Elsewhere, the upper left corner failed to see the same bounce and pieces such as 1y1y edged down another 0.2 to 114.9. Note previously some sources have argued there is still scope for the ULC to retrace lower towards the 2023 lows. “The terminal rate is in sight and we expect less volatility,” a source said.
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.
Sell 3m1y strangles - NatWest
In weekly rates research NatWest favours selling EUR 3m1y strangles. The bank writes:
- “Caught between sticky inflation and financial risks: sell the range. It's a commonplace now to remark that the past month’s turmoil mean higher rates (4%+) in Europe are now much less likely. On the low side, though, we also still believe that inflation will be sticky and we expect financial stress will probably not emerge as the ECB settles at 3.25% or 3.5%. If this limited upside/limited downside argument is right, the logical thing to do is to look at ways to sell the range.
- "Our sales team suggested selling 3m1y strangles this week – we’re very happy to repeat that here. The structure has cheapened slightly since midweek but the 3.2%/3.85% strangle for approximately 19bp running breaks even at 3.01% and 4.04%. The ATM straddle earns 40bp running, making a breakeven at expiry of 3.27%/4.07% - we’d skew that slightly to the low side because risks are likely skewed that way (which is how the market prices it of course). We think the terminal rate will be 3.25% or 3.5%... the 3.5% strike on 3m1y might be sold for around 43.5bp as we write (breaking even at expiry 3.075%/3.935%).”
New structured issues
For a summary of recent structured issuance, please see EUR MTNs.