GBPCHF back-end volatility: 1Y -2Y GBPCHF straddles strike us as an excellent defense against Brexit chaos, for a few reasons:

1) GBPCHF vols have retraced nearly all the way back to their post-referendum lows (refer above chart), so appears to price in the sort of benign post-Brexit scenario that unfolded in Q3’16.This complacent vol pricing owes in large part to elevated GBP vs. CHF correlations via USD (north of 50%) thanks to the post-US election broad-based dollar surge but is prone to a sharp breakdown either in the event of idiosyncratic UK political stress and/or a broader risk aversion.

2) at 10.4 in 1Y and 10.6 in 2Y (mids), GBPCHF offers relative value edge over vanilla GBPUSD vols that trade 8/10th of a vol over, even though long run historical beta between the two is nearly 1. This relative pricing reflects the current regime of CHF inertness driven by persistent SNB intervention in the franc and is locally fair vis-à-vis day-on-day realized spot volatility, but not for a less orderly environment of above-average spot moves when local elasticities can come unhinged.

After Q1’15's de-peg experience, it is prudent to be long protection against discontinuity risk in SNB’s currency policy, especially when it does not entail paying a material premium;

3) While daily realized volatility in GBPCHF is not remarkable, the mild slope of the 1Y-2Y vol curve mitigates theta decay, which in any case is not onerous for options that far out in tenor.