Take Some Risk
An upside of the confoundingly low levels of volatility is that it’s cheaper to take risks. According to State Street’s Graf, it’s worth taking directional bets while the cost is so low. He points to dollar-yen calls as an opportunity to make some profit.
Some Asian sovereign investors and large hedge funds have been using low-cost option structures such as butterflies and double no-touch trades to boost their trading revenue, according to traders in Europe, who asked not to be identified because they aren’t authorized to speak publicly.
“Low volatility means little movement in the markets and by definition makes it more difficult to extract alpha out of FX moves,” said Andreas Koenig, head of global currencies at Amundi. “We are expressing more and more positions via options.”
New Playbook
Traders need to throw away the old playbook in range-trading markets, said Allianz’s Brzezniak. A low-volatility environment makes it harder to make money on trend or momentum strategies as the moves tend to be short-lived.
“Likewise, a lot of people look at charts, they see some level being broken and go all-in and some massive move happening,” he said. “As we have seen in range-bound, mean-reverting markets, that hasn’t worked.”
Nimble on Pound
The pound has been trading in an even tighter range than its peers since the Brexit deadline was extended until October, with volatility slumping. The key to making profits in this environment is timing to take advantage of brief periods of volatility on headlines, said BlackRock Inc.’s chief fixed-income strategist Scott Thiel.
“There’s going to be volatility within a relatively narrow range, so the willingness to trade within that range can be fruitful if you get the range right,” he said. “The moves are big enough to make money even in this relatively stable environment we’ve been in, but it’s very tactical in nature, it’s very timing-sensitive.”
This article was provided by Bloomberg News.