Realized vols in USD/BRL have been steadily edging lower over the past few weeks but holding stronger near 3.20 levels, and gamma screens rich despite the material 3 vol+ decline in implieds since the Brexit vote 1M USD/BRL ATM @ 15.3 vs. recent realized vol (on hourly data, 1-week @ 8.5, 4-week @ 14.2).

We like selling gamma to monetize the ongoing stability in real via vega-neutral short 1M vs. long 3M calendar spreads.

The choice of the calendar spread as a quasi-protected short gamma play is motivated by:

1) Worsening of entry levels on over an outright shorts due to the fall in vol;

2) A history of outperformance of vol curve steepeners across EM currencies; and

3) A slew of stretched-looking risk premium metrics across other asset markets (VIX near historic lows, global data surprises at multi-year highs, extremely strong EM inflow momentum, compression in high-yield credit spreads etc) that render it prudent to overlay some degree of protection on gamma shorts. The vol curve is only mildly upward sloping (3M –1M 0.6 mid) and not an impediment to buying 3M expiries over 1M.

Directional investors not given to active delta-hedging can consider buying calendar spreads of USD call/BRL put one-touch options instead of straddles.

For instance, short 1M vs. long 2M 3.42 strike USD call/BRL put one-touch calendars cost a net premium of - 16% on mid (equal USD notional/leg) and roll up to - 45%in a month’s time assuming unchanged markets, resulting in a static carry / payout ratio of 2.9X.

Even 4% round-trip transaction costs allow for more than doubling of the upfront premium, which is an acceptable return for a month’s work in a defined maximum loss option format.