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Foreign Exchange

Euro option vols remain well bid

Negative sentiment has quickly turned from the dollar to the euro, as concerns about potential defaults by the weakest members of the eurozone raises doubts about the stability of the single currency. Option markets are providing a cheap way to hedge and take advantage of the euro’s first-quarter rally.

Euro vols are remaining well bid this week as a series of negative headlines about Greece, and a possible preemptive restructuring of its debts, have weighed on the euro, which has hit a six week low of $1.4123.

However, the rally in the first four months of 2011, that has taken the euro from about $1.3000 to $1.4830 last week, has been an ideal time for corporates step up hedging activity, which has seen strong demand for vol, say option traders.

“Towards the top end of the range you kind of get the feeling that things are possibly starting to turn, and even without the headlines, when you start to see the corporate hedgers involved, “ says one trader. Corporates have been active in buying out-of-the-money puts on the euro.

Traders say most of the activity is coming from corporate hedgers, rather than speculative accounts, with most interest in the three-month to one-year range. “I’ve not seen an unusual number of people trying to buy short dated downside in Eurodollar from the speculative point of view,” says another trader.

If anything flow seems to be driven by something that is more leveraged, but slightly less aggressive. Dealers report good interest in structures such as put spreads, and reverse knockouts, which have been popular because of their limited level of decay.

Meanwhile in dollar-yen, dealers say global macro players have been active. Dollar-yen has benefited from the change in dollar sentiment that has seen it bounce off the Y80 level, from a six-month high of Y85.50 in April.

Traders say some global macro players have begun to look speculatively at top side dollar yen calls, though the strikes aren’t being positioned for an explosive move on the top side, they add. Again the interest has been in relatively short-dated reverse knockouts that don’t pay away a lot of time decay, traders say.

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