EURNOK testing the 10.35 support after NOK steadily been trading stronger from the November lows. This is in line with the higher oil price and the improved risk sentiment.
Vols have traded lower as risk sentiment improves and EURNOK spot trades lower. 3 month vol is currently trading around 8.75 just above the lows seen in August and vol is currently trading with a negative risk premium of 1 vol, realized spot move is 1% higher than implied vol.
Risk reversals trades at 1.25 for EURNOK call which is just below the mean level over the last 6 months but about 0.5 vols higher than the lows back in August.
We see good value in owning downside options with the relatively low and cheap vol and high risk reversal. We prefer to be long a bit further out on the curve as the next leg higher in oil and risk sentiment might not happen before the vaccine rollout has reached a higher level of penetration.
Below are a few trade examples for lower EURNOK:
Buy 3 month 10.0000 EURNOK put
Cost 480 pips
The put can be partially financed by selling a lower delta call.
Buy 3 month 10.0000 EURNOK put
Sell 3 month 11.0000 EURNOK call
Cost 150 pips
Alternative
Sell 3 month 10.3000 EURNOK put in 1 mio
Buy 3 month 10.0000 EURNOK put in 3 mio
Cost 50 pips
The strategy is close to zero cost with the risk there will only be a small move lower as the structure will be long 1 mio from 10.3000 to 10.0000, max loss of 3000 pips if spot close at 10.0000. The strategy will then be net short 2 mio below 10.0000 with a break even at 9.8475.
Spot ref. 10.3500