EUR Vol: Implieds higher amid short-covering talk

Green up arrow 11 Jun 2020
Euro implieds moved higher amid talk there could be some short covering of positions.

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  • Implieds higher amid short-covering talk
  • Short Euribor strangle - JP Morgan
  • New structured issues

    Implieds higher amid short-covering talk
    Euro implieds are higher across the grid as global fixed income sold off and the 10y Bund yield revisited the 2.50% (+4bp) earlier in the session.

    In gamma, dealers seem to concur that there has been some short-covering in the market, supporting some of the right-side pieces. Today 3m10y was up 1.1 at 97.9 while 3m30y was up 1.8 at 90.0. “There haven’t been any big moves in the underlying today, but it’s been better bid for a while as you get the impression that some dealers are covering their shorts a bit,” said one.

    Elsewhere, the left-hand side also saw an upswing after dipping lower during yesterday’s session. Today 1y1y was +1.3 at 114.9. “We’re at the bottom of the range and (callable) supply does not seem to have been at the levels it had been earlier this year,” a trader felt.

    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 Euribor strangle - JP Morgan
    Strategists at JP Morgan hold a short strangle position in Euribor futures. The bank explains:

    • “We stay short unhedged 96.125/96.375 strangles (Sep23 Euribor futures at 96.17) that we recommended last week. The breakeven ranges for the trade is at (3.32%, 4.18%). We have a strong conviction that Sep23 Euribor futures will remain in this range over the coming weeks.

    • “As discussed, we see very low risk of an ECB rate cut given still elevated inflation risk and robust macro backdrop. Similarly, the bar for the ECB to take policy rates above 4% is also high.

    • “Finally, as we have discussed previously, mean reversion in front-end yields is high which also supports infrequent delta-hedging of short volatility options. Overall, we keep shorts in Sep23 strangles.

    • “Near-term risk to this trade could come from resurgence in implied volatility on any risk-off dynamic and further richening of call-skew but we still have strong conviction on the trade as an expiry trade.”

    New structured issues

  • NordLB issued EUR 15y NC5 callable due Jun 2038. Coupon pays 4.75% with calls in Jun 2028 and Jun 2033. Self-led.