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Stay short in USDCHF; trade is very close to stop-out level.
This trade was initially recommended in September post BoJ’s September policy framework change on the expectation that the BoJ shift would bring attention to central banks which are near limits and result in the strengthening of those currencies, and then we maintained the same short portfolios consistently during October as well, for now, the trend is in complete mood of favouring bears of this pair.
CHF was a prime candidate with SNB’s balance sheet size which has continued to grow by as much as 20%pts of GDP since the floor collapsed in 2015. Moreover, the expectation was that the dollar would trade at a discount relative to other reserve currencies like EUR, JPY and CHF.
Short USDCHF has come under pressure given the relentless and idiosyncratic decline in EURUSD. While we are bullish CHF long-term, we leave our stop of 0.9970 on this trade unchanged and are close to being stopped out.
1w IVs screaming off in USDCHF above 13.5% which is highest among G10 currency space, while risk reversals have also been in sync with IVs (with rising negative flashes in the same tenor indicates hedgers are worried about underlying spot FX losses) and spot FX movements as stated in our technical lines, bears are on competitive advantage both in short and medium run.
Hence, we uphold the significance of USD/CHF long put ladders:
ATM implied volatilities are rising considerably, 13.5% (but likely to shrink at 9% for 3M expiries). Well, if you have short positions in option and IVs are rising in short tenors and shrinking away in longer tenors.
Hence, we recommend long put ladder or bear put ladder strategy, that is a limited retruns and unlimited risk strategy in options trading that is employed as we reckon that the IVs are the least and the underlying spot would experience little volatility in the near term.
To setup this strategy, the options trader initiates the following positions (as shown in the diagram, these positions resemble put ladders):
Go long in an in-the-money put, short more number of lower strike out-of-the-money put of the expiration date.
