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One of a handful of currencies where we do not mind earning the fat vol carry on offer is BRL. Front-end USDBRL vols have popped higher over the past two weeks alongside a bounce in the spot, and are once again packing in a sizeable 4-5 % pts. of premium in comparison with trailing realized vols.
At the same time, the BRL vol curve has mildly inverted in 1M – 3M expiries such that it has become economically viable to sell gamma hedged with vega longs via vega-neutral short 1M vs. long 3M straddle calendar spreads.
Markets have essentially returned to the same configuration when we first recommended BRL calendars last month, and we take this opportunity to replenish the -1M vs. +3M straddle calendars that expired this week into a new clip of the same structure. The fundamental case for vol selling in BRL rests on both the substantial risk premium on offer and a constructive take on currency macro.
Directional investors not given to delta-hedging can consider buying calendar spreads of USD call/BRL put one-touch options instead of straddles. For instance, short 1M vs. long 2M 3.40 strike USD call/BRL put one-touch calendars cost a net premium of 16% on mid (equal notional/leg). Assuming unchanged markets in a month’s time, the 1M 3.40 expires worthless and the 2M 3.40 rolls up to 40%, resulting in an acceptable static carry/payout ratio of 2.5X.
