Thursday, 4 July 2013

Shorting vol

Volatilty has, understandibly, risen a lot in the past 2 months. For this reason positioning short vol is a possible (albeit risky) trade to enter. EM FX vol and AUD 1 month IV is where I'm currently looking at, as well as possible the GBP (unlikely).

Below shows a composite of EM ccy's 1 month IV and also the AUD 1 month IV. Both have moved a lot and look like a reversal is possible.

EMFX vol and AUD 1mIV. Reuters
Positioning through either a condor or short straddle with work, but for ease I will examine the possibility of a short straddle.

I will look at FXA (AUDUSD ETF) as an example, but I'll execute through FX options

Writing an FXA 17th Aug call and put at $91

Here we can see some stats on the left pane, with the chart of FXA (upper and lower +expiration drawn on)

Most importantly you can see the payoff structure, and likely this will be held to expiration so you can see potential vs. price at that date.

So as long as FXA (AUDUSD) stays between 87.50 and 95 we will see a profit depending on how close to 91 it is. I see that IV is likely to drop over the summer and while this is a representative trade example for FXA, actual spot FX is largely similar as is EM FX.

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