HALISTER1: Protect Against Any Brexit Fallout Using 2Y/10Y UST Gamma: SG

Protect Against Any Brexit Fallout Using 2Y/10Y UST Gamma: SG

(Bloomberg) -- Protect against fallout of a Brexit scenario via asymmetrical relationship between 3m2y/3m10y U.S. Treasury option vol spread and 2y cash UST yields, Societe Generale strategist Jamal Meliani writes in client note.
  • Sell Sept. 2016 TUU6 109.375 straddle vs buying TYU6 132 straddle; delta-weighted (100 by 50), with target 25ABPV and stop 5ABPV
  • Relationship of 3m10y/3m2y vol spread to 2y yield isn’t linear: spreads increases sharply when the yield falls below 0.60%, while being floored at roughly 10ABPV for 2y yield above 0.9%
  • Risks: A sharp bull steepening of the 2y7y UST curve, with a more pronounced Brexit fallout fueling a global equities crash and expectations of a complete Fed U-turn
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Jamal Meliani (Societe Generale SA)

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