FxWirePro: Is gamma selling worth in EMFX vols? Uphold calendar spreads amid Turkish tailspin

USDTRY is spiking and establishing swiftly new all-time highs day-by-day owing to a robust dollar outlook and new sanctions imposed on Turkey’s government. The pair has started bouncing from the lows of 5.2161 level to the recent highs of 7.0250 levels (refer daily technical chart). The bullish streaks have continued today as well. The lira continues its freefall despite Erdogan’s attempts to buoy the economy.

For the lira to stabilise on a sustainable basis President Recep Tayyip Erdogan would have to change tack in a radical manner. However, sadly it does not look as if that was going to be the case. 

While the value in gamma selling appears less appealing on the back of deteriorating risk sentiment but realized vol still looks too bearish to turn the page on gamma selling just yet with early bettors on mean-reversion risking to incur significant intra-life theta bleed.

This extreme volatility not only presents an opportunity – but it is causing parallel movements in both the EUR and Asian Stocks – due to these markets’ tight connections with Turkey’s faltering economy.

Realized vol continued to weigh on more than half of the 4
long gamma returns (refer 1stchart). Despite the global vols 2016 taking a leg higher amid deteriorating risk sentiment we are
wary of calling a reversal just yet with the summer calendar
still in full swing. 

At multi-year highs, EM-G10 spread
(3vols) is not showing signs of abating as idiosyncratic
developments (TRY exploding +15vols and RUB edging
higher +2.5vols since last week) are keeping EM vols firm.


The portfolio of short front vs long back tenor EM vol
calendars came under pressure but now we see increased
risks from a more systemic turn for the worse. Dark clouds
are starting to throw a shadow over gamma selling.

However, the tension between optically wide implied-
realized vols and souring risk sentiment, a familiar
conundrum for option investors, is one that tends to
eventually resolve in the direction of higher vols but with
significant intra-life theta bleed for early bettors on mean-reversion. 

At spot reference: 6.8869 levels, contemplating above driving factors, on hedging grounds we initiate RV trade - 3m USDTRY call option, short 1m put. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index has shown 58 (which is bullish), while articulating at 13:26 GMT. 

For more details on the index, please refer below weblink: 

http://www.fxwirepro.com/currencyindex