EUR Vol: Implieds drop as yields retreat; Top left value?

Implieds drop as yields retreat
Euro implieds declined across the grid today which sources mostly blamed on directional movement in the underlying. The Bund traded in positive territory for much of the session, rallying up to 81 ticks intra-day, although later eased back during the afternoon and was last up 15 ticks.

The top left and right-side gamma declined by 1 to 1.5 normals as yields moved lower. For instance, 1y1y dropped -1.8nvol at 111.5 normals while in the top right 3m10y was marked -1.2nvol at 94.6 normals. Note that some have suggested there could be "pockets of support" for top left implieds although that was less the case today. 

Amid the drop in forwards, vega also moved lower with 5y5y last -1nvol at 95.1 and 10y10y last -0.7 at 74.8. "Maybe there is also a bit of flow in the pipeline that could be weighing on vega," suggested one trader. 

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.

Top left opportunities - BNPP
In its latest rates vol weekly BNP Paribas identifies opportunities in the top left of the euro vol grid. The bank writes:

• “Last month saw a stark re-pricing of the vol grid with top left vols collapsing while the top right outperformed. The decline in the top left was largely due to the lack of realised vol, precipitated by near-term downside risks dissipating and strong forward guidance by the ECB.

  
  

• “Our view is that this move has now over-extended and we believe that at the current levels the top left represents value to hedge against the re-emergence of downside economic risks. Given the particularly acute decline of 1-3m expiries on the 1y tail, this is our preferred area to express the view.

  
  

• “We note that the correlation of implied vol versus forwards has been increasing recently, particularly in the 1y1y area of the grid. If this persists it may put some upward pressure on collars which suffered heavily during the US regional banking concern and have failed to recover since…”

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