Selective Option Hedges Outperform on Provocative Korea Missile
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
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UUID: 7947283
(Bloomberg) -- USD rates receiver spreads and upside options on gold outperform relative to the yen as Kim Jong Un’s latest provocation tests the boundaries of an international response.
- While the correlation between gold and yen is at record highs, volatility ratios between the two are near historic lows, suggesting gold may offer a more efficient payoff structure, see more here from Aug. 25
- Risk-off option structures on gold that have low premiums and high convexity exposure may be attractive to hedge a full-blown crisis from either geopolitical risks or White House turmoil, see more here from Aug. 21
- See example structure here from July 14 on how receiver spreads may appeal to investors looking to hedge geopolitical risks that game theory suggests will ultimately not lead to conflict, as well as the evolution of the Fed’s reaction function from rate hikes to reliance on balance-sheet reduction for policy normalization
- TY Oct. futures calls extend richening over puts, while ATM 1-month +0.5-ppt at 4.2% remain historically subdued; see chart here; KOSPI2 3-month ATM implied volatility has increased to 13.3% but remains below the Aug. high of 16%; gold +$11 to $1321, 10Y UST -6bps at 2.10%, USD/JPY -0.7% to 108.50
- NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
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UUID: 7947283