Euro and oil have a decent downside on a Le Pen victory: euro could fall about 10 cents (10%) to about 0.98 over a few weeks and oil could decline by 5-10%.

In the remote scenario of a Le Pen Presidency with supportive government and Parliament, 10Y Bunds could approach 0bp and 10Y France-Germany 200bp, with sharply wider Bund swap spreads (54bp), FRA/OIS (20bp) and EUR/USD cross currency basis (-60bp), and higher volatility (Bund implied 6bp/day).

For now, please be noted that the OTC indications of 1-3m combinations are the most conducive for the construction of put ratio back spreads.

We’ve already highlighted in our recent write ups on richness in EURJPY skews.

The EURJPY volatility surface is currently offering very attractive shorting opportunities 1m/3m put ratio backspreads, as ATM volatility is rich and 1m/3m IVs are positively skewed. Here, we recommend a couple of trades taking advantage of both the volatility and skew premiums.

The 1m risks reversals are bidding for higher prices in underlying EURJPY spot FX with downside risks in long run (3m RR). 1m IVs are shrinking away while 3m IVs rising, we interpret this as the options with a higher IV cost more. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favor. If IV increases and you are holding an option, this is good. Unfortunately, if you have sold an option, it is bad. A seller wants IV to fall so the premium falls. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.

Traders tend to view the put ratio backspread as a bear strategy because it employs puts. However, it is actually a volatility strategy.

So entering the position when implied volatility is high and waiting for the inevitable adjustment is a smart approach, regardless of the direction of price movement. Based on volatility and time decay, the strategy is a “price neutral” approach to options, and one that makes a lot of sense.

Hence, one could write 1m ITM put options, while adding longs in 3m ATM or OTM put options simultaneously.