FxWirePro: Deploy naked straddle shorts in USD/TRY on reasonable IVs

USDTRY has been slightly volatile in recent days, but ultimately range-bound. Investors should watch the exchange rate closely going forward as the demand for dollars has shot up in the banking system.

Recently, CBT's one-week swap auction witnessed record-high $10bn demand, with CBT filling only $1.25bn of this. Until a month ago, dollar demand at these swap auctions averaged under $2bn.

Local media report that the demand for dollars is higher because of seasonal requirements, which is probably true. If routine seasonality is the driver, then it will likely not move the lira by much either way.

Nevertheless, there is something not so routine about this year - CBT is managing demand and supply of funds in the banking system using a tightly-controlled set of market operations.

This set up can easily be accident-prone when the underlying volume of demand shifts rapidly - a spike in volatility would be the obvious outcome of watching out for.

Option Strategy (Naked Strangle Shorts):

Please be noted that the IVs of 1w tenor have been flashing no dramatic prints, we think these vols are quite sensible on the above stated fundamental news.

For those whose foresee non-directional or no dramatic moves on either side and prefer to remain in the safe zone, we recommend shorting a straddle considering flat IVs or shrinkage.

Thereby, one can benefit from certain returns by shorting both calls and puts.(preferably short term for maturity is desired and ensure options greeks as shown in the diagram).

Maximum returns for the short straddle is achieved when the USD/TRY price on expiry is trading at or near spot levels only as both the instruments have to wipe off worthless. So that the options trader gets to keep the entire initial credit taken as profit.