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Developments in Turkey late on Friday during the NY trading session put a damper on the EM FX rally. The TRY suffered its largest daily loss since the 2008 crisis and the risk-off tone permeated across emerging markets. But early gains of TRY during Asian trading sessions have not been able to sustain, USDTRY bounced back from the lows of 2.9261 to the current 2.9608 levels.
Markets were rallying around the world on speculation global monetary policy was going to remain loose, there was a lull in the country’s fractious politics and President Recep Tayyip Erdogan’s government was moving to normalize relations with Russia and Israel.
However, as Asia markets open the majority of EM FX losses are being reversed as the domestic situation has stabilized (the lira has even recovered 50% of the losses sustained on Friday).
Nonetheless, deep divisions and tensions remain within Turkish society and these will not dissipate in the aftermath of the attempted coup.
The AKP's swift response, entailing purging military and judiciary officials coupled with the possibility of cracking down further on critics of the ruling party, is a short term fix for investor sentiment but one that could prove counterproductive over the medium term.
OTC Outlook & Option Strategy:
Let’s glance through the sensitivity table, the current ATM IVs of USDTRY has been considerably shrinking away when you see 1w IVs, while OTM put strikes pop up with higher vols, gamma, and vega flashes to signify the sensitiveness underlying spot to the ITM put strikes, this, in turn, both the volatility and skewness implicit in option prices, which means underlying spot FX likely to travel towards this directions.
Well, contemplating above fundamental aspects, IV and trend factors in mind, it is advisable writing 1W (1%) ITM put with positive theta and delta closer to zero, while going long in 2W ATM -0.49 delta put (both sides use European style options).
This credit put spread option trading strategy is recommended when the spot FX is anticipated to inch higher moderately in the near term and not prolonged in the long term but continue with long term downtrend.
