The year has started with a healthy risk sentiment which in combination with supply of vol from corporate hedging have put pressure on vols. Corporates are usually sellers of vol in their hedging structures and tend to put on the hedges for the full year in January. This supply of vol can be significant and usually fades when we go into February.
We have seen a sharp sell off today with EURUSD 1 year vol down to 6.1, compared to 6.65 two weeks ago, and USDJPY 1 year down to 6.5, from 6.9 at the start of the year. 1 year vols now trades at the lowest levels since the pandemic hit the market in March last year. There is still a bit of way to go before we see the levels from January 2020, but keep in mind those low levels were reached after a very quiet 2019.
We think it is a good time to buy some longer dated options as a core position for 2021, now after the last days of sell off.
With the current vol, a 1 year at-the-money forward in EURUSD cost 305 pips, for either a put or a call. In USDJPY, a 1 year at-the-money forward cost 275 pips. For example, with current spot and forward the break even for a 1 year EURUSD at-the-money forward call will be just above 1.2500.
Buy 1 year 1.2215 EURUSD call or put
Cost 305 pips
Buy 1 year 103.08 USDJPY call or put
Cost 275 pips
Spot ref. EURUSD 1.2110, USDJPY 103.60