You might not make money, but this is good risk-reward.

A lot of FX crosses have gone nowhere (or somewhere but very slowly) in the past 2 years. Just like Oil didn’t move much between late 2012-2014 considering its historically high vol.

Was there a new regime? After 1 year of falling realized volatility the bid kahuna came and finally oil moved by -65%. Realized volatility exploded.

WTI, price and vol

In FX land, with CB’s hyperactivity, maybe it is indeed a new regime. Who knows?

Fact #1: Differently than bond yields, volatility cannot go below zero. Vol is the average of how much something moves. And nothing can move “less than nothing”.
Fact #2: The closer vol gets to zero the higher the odds of complacency, thus accumulation of imbalances.
Example: If you were guaranteed that price wouldn’t move in an FX cross.. how much would you have of positively-yielding USDMXN shorts?

The answer to “How much would you have of a bet that can’t lose money, but generates positive return?” is always “As much as you give me!”

Currency volatility in G10 has basically repeated 2007’s and 2014’s moves. New all-time lows or very close to old all-time lows.

I have no clue if we’ll se large moves in the coming few months, but risk-reward for going outright long volatility or for switching directional FX trades into option format improved a lot.

Depending on the cross and direction of an FX trade, in case it has positive carry, basically the carry pays for the first few months of carrying the opt while you hold a position:
– long convexity
– long vega
– with limited downside
– with extremely low theta (especially in the first few months

1y USDJPY carry: 2.02%. 1y ATMS USDJPY call premium: 1.70% USD
1y EURUSD carry: 2.06%. 1y ATMS EURUSD put premium: 1.31% EUR
1y USDCHF carry: 2.35%. 1y ATMS USDCHF call premium: 1.35% USD

Yes, these are not delta-1 positions. And these 1y vols today in 3 months will be 9-month vols, which are lower (vol roll-down), but that means losing between 20%-35% of the premium if vols stay where they are and spot too.

Here’s an illustration of Long Vol trade: if you bought EURUSD 1y vols and did a NY-close delta-hedging, every day, ignoring transaction costs, at current levels expected value is positive.

End-note: vol is typically for selling on spikes. Too many insurance companies survive over decades by selling premiums, not buying them.

Here’s quick view of historical Bloomberg implied vols for a few pairs. Most of them in the lowest percentile in past 15 years.







Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.