Thursday, February 08, 2007

WOW! How cheap is FX vol???

Just bought some EURUSD 1.31 calls, expiring March 2nd...paid 60 in £15/point, so £900 premium. ie. if EURUSD is above 1.3160, I am in-the-money.
I was originally going to buy EURUSD spot which is trading at 1.3035, but the option seems so cheap and limits my downside so much that this is the better trade.
With the mortgage industry imploding, foreclosures running ahead of the last recession, and talk today on the back of inventory numbers that Q4 GDP will be revised downwards, US rates have clearly topped, and I expect the FED to be cutting with a few months...and even if they don't, I think it will get priced in.
Combine that with a hawkish ECB, Trichet pretty much confirming they will hike next month and then almost certainly looking to hike again, and with money growth just out of control in the Euro area, I think the Euro rate curve is underestimating how high rates can go.
So a very obvious way to express these views is buying EURUSD. If it starts moving my way, I plan to increase the position and try and piggyback onto a larger trade.


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