I suggest you check out ALL of the relevant articles that i attach to this post so that this post makes sense
In a nutshell i am heavily short GU, about 8-9/10 @1.44/5 (@1.41 only 2/10) - so i advise shorting ANY pullbacks we get to >1.44 in the coming weeks.
- Also SHORT EU is a good trade as IMO it is heavily over brought, and hasnt priced any of the fundamental supply/demand stimulus ( e.g. EU is trading at levels higher since the dec 15th hike, March ECB cut and UK EU Ref uncertainty pricing) which all should have depressed the market lower. Thus short EU might be the better play if we dont get any GU pullbacks, since EU still has alot of downside to factor in imo .
- The best indicator for dis-ciphering what the market has in store for GU and EU imo is implied , since it uses options (actual demand/ supply of the market) to predict what the will be in the future.
- Currently EU and GU on Friday both traded in their 2 year 99th and 100th percentile implied vol reading at 14.78% and 16.15 respectively.
- Furthermore, GU's IV has been trading higher everyday this week and has set new 52wk highs everyday. The (time horizon) curve is severely fattened/ steepened around the next 2 weeks due to the up coming e.g.
23.55% 16.5% 16.15% 13.75% 10.25%
1m fwd 1wk fwd current 1wk ago 1m ago
- Hence, and as you can see, now (or last week or the week before that) is the time to get on the curve for GU downside since has been rising and is projected, to rise into the FOMC and UK EU Ref - before tailing off quite considerably ( 3m fwd at 16%, 6m fwd at 13.25%).
- In addition to this we are seeing Historical Vol trade relatively flat - indicating that GU price action hasn't yet fully priced in the potential future event , meaning we can expect large legs downwards in the future, since HV isnt at extremely high levels (as pictured), there is certainly room for price action vol to move higher, thus there is room for GU to trade heavily bid and shed a several more 100pips.
- Further we have seen a negative shift in Risk Reversals for GU and EU - GU the most extreme now with 1wks at -1 and 1m at -7.6 (EU -0.1 and -0.45). Risk Revs (RR) look at the Supply/Demand of OTM Call/Put options and RR is the difference between the vol of calls minus puts.. GU RR is currently growingly negative at -1 and -7.6, implying that puts are trading much more expensive than calls as their demand is higher.
GU puts are more expensive as investors over the next 1wk-1m period are increasingly demanding downside GU exposure or want to hedge their underlying length MORE than they want upside call exposure. From this skewed options market demand for puts (rather than calls) we can observe that GU downside is net what the market is positioning for, and therefore, GU downside/ short is ALSO what we should consider playing in the spot market.
Increasing and decreasing RR supports SHORT positions as; 1. investors dont want to hold assets that have increased vols (it is seen as increased uncertainty and risk) and 2. investors are increasingly purchasing put options which at some level DOES represent investor sentiment in the spot market also - these are why i advise getting short if you haven't already, asap for GU to play the .
Questions, comments and feedback - welcome!
ATM volatility as of 7am GMT for GU has sky rocketed since Fridays close. 1wks from 16.5% to 19% (+2.5) and 1m from 23.55% to 28.5% (+4.65).
GU Risk Reversals also have rallied in heavier put skew area with 1wks at -1 to -1.8 (-0.8) and 1m at -7.6 to -8 (-0.4)
EU ATM and RR have also increased but somewhat less aggressively, with RR increasing also, 1wks from -0.45 to -0.9 and 1m from -1.95 to -2.85.
With both ATM and RR still increasing rapidly (especially in GU) and in favour of short positions (higher vol and greater Put vs call holdings/demand) - in the spot market we should be, if not already, looking to execute SHORTS even more so and as soon as possible.
I will not play the brexit vote!! thats a key thing to remember, if you trade well, you dont need to trade the vote, instead you just trade the upcoming volatility e.g. on friday how it moved 400 pips south, we could TP 400 pips at these levels 2 weeks before the vote and be up 400. So my point is, the actual vote shouldnt matter, ideally you should TP during the vol before the event.
Trying to "trade the vote" is he quickest way to lose money as you'll never beat the algos!