Hedging a Trump victory with FX options
Oct 16 (Reuters) -With the U.S. election in just three weeks and former President Donald Trump regaining a lead in the polls, FX option dealers report increased demand for options to hedge the risk of a Trump victory.
Societe Generale think AUD/USD would be the most at risk from a Trump win and in a recent client note, are highlighting three trades to hedge that risk.
The note reminds readers of the initial USD outperformance after the 2016 election, where the AUD lost 6.7%. Fundamentally the AUD is also exposed to China and potential trade tariffs, while the USD would benefit from expected tax cuts and potential inflation risk.
Societe Generale's FX option trader notes AUD/USD implied and realised volatility increasing amid the USD rebound, but AUD put options are not increasing in similar proportions, which makes them appear cheap versus regular at-the-money implied volatilities and enhances the value potential of the following trading strategies.
With AUD/USD spot at 0.6720 a 2-month expiry 0.6500 AUD put with a knock-out trigger at 0.6200 only risks an up-front premium of 0.25% (16 USD pips). It allows the holder to sell AUD/USD at 0.6500 as long as 0.6200 has not traded by expiry.
A 2-month expiry 0.6550/0.6450 AUD put spread costs 0.35% and allows the holder to sell AUD/USD at 0.6550 but any profit is limited to 0.6450. This option has a maximum leverage of 4.4 times the premium if spot is below 0.6450 at expiry.
A 1-month expiry 0.6400 one touch for a premium of 15% of the total payout - would be claimed if 0.6400 trades before the option expires.
For more click on FXBUZ
AUD/USD https://tmsnrt.rs/3BMlFHE
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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