While longer- dated EURCHF volatility has now traded at almost twice the levels it peaked at in the global financial crisis (10%), it remains the outlier in terms of making a comparison between today’s market crisis and 2008, analysts say. For instance, as an indicator of risk aversion, one-year Australian dollar-Japanese yen implied volatility is currently trading at 17.5%, while in 2008 it peaked at 37%.
| EUR/CHF 1 year implied volatility since Sept 2008 |
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| Source: Bloomberg |
| AUD/JPY 1 year implied volatility since Sept 2008 |
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| Source: Bloomberg |
The spike in EURCHF vols is probably the result of the option market being caught out of position ahead of the large spot move in recent weeks, say option traders.
“The market has been short options, and short risk reversal on EURCHF, and the market’s positioning for the spot move has been poor,” says a head options trader at a European bank in London. “It’s clear the market hasn’t had a good time of it, as you can tell by the level of risk reversal and implied vol.”
EURCHF one month at-the-money volatility hit 22.5% today from 20.5% yesterday, having risen from 18% at the turn of the month. Risk reversals have become more skewed to put options in recent days, with the risk reversal sloping upward, suggesting that positioning at the back end of the curve is still short options.
Another trader comments that there was previously a lot of long-dated option structures and this gave the market a decent amount of vega, which they could have sold out of. But with the spot cross rate so much lower now (1.1420 on August 1 and recently trading at 1.0550), that isn’t the case anymore, thus making EUR-put, CHF-call risk reversals so well bid.
Thus much of the move in vols is based on market positioning rather than fundamentals.
| EUR/CHF 1M 25D risk reversal |
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| Source: Deutsche Bank |
| EUR/CHF 1M-1Y volatility slope |
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| Source: Deutsche Bank |
Traders say that liquidity on cross rates has been minimal in recent sessions and hedging positions has been primarily executed using separate currency pairs.
“Clearly, when things start to move like this, you have to hedge yourself with the stuff you can get your hands on, so clearly if you’re short EURCHF gamma, the easiest way to hedge is to buy euro or swissie options, so you do end up running some pretty messy positions,” says another trader. “When you have weeks like this, you just have to go to the most liquid stuff.”
Market makers report few clients adding risk at this stage, with most of the activity driven by position covering, and the cleaning of risk.