The risk-off mode and USD buying has continued through the week and the USD index is up 1.5% so far this week. EM and high beta G10 have suffered the most on back of this move. Long NOK has been one of the favorite risk-on trades over the last months and we have seen a lot of unwinds of the long NOK positions over the last days, this has made NOK the worst performer in G10. USDNOK is up 4.5% this week, in line with the move we seen in USDZAR and just shy of the worst performer USDMXN, which is up 6%.
Vols have been marked higher all week with 1 month USDNOK up from 11.25 to 14.25 and 1 month risk reversal is up from 1.25 to 3.00.
Below are a couple of strategies to take advantage of the higher volatility:
Buy 1 month 9.70 USDNOK call in 1 mio
Sell 1 month 10.00 USDNOK call in 1.5 mio
Cost 420 pips
Ratio call spreads take advantage of both the higher vol and risk reversal. The 9.70 option trades at 15.0 vol and the 10.00 trades at 16.70 vol (mid rates), i.e. you get paid 1.70 vol buying the call spread. You will be net short 0.5 mio above 10.00 which gives a break-even at 10.5580.
Alternative sell short dated covered call against long spot or sell short dated put as spot entry trades.
Sell 1 week 9.7000 USDNOK call
Receive 380 pips
Keep a long spot position and use the sold call as a take profit level.
Sell 1 week 9.5000 USDNOK put
Receive 425 pips
If you like to buy USDNOK on dips sell USDNOK puts and receive a premium. You will buy USDNOK at the strike level at the expiry if spot trades below the strike.
Spot ref. for the above examples: 9.5800