What can we say about the SNB move that hasn’t already been covered? Simple – we can indulge everyone’s latent voyeuristic tendencies and look at what positioning may have been like in EURCHF OTC FX Options at the time of the SNB announcement.
FX Options in SDRView
This is an area we haven’t highlighted in the past. Here at Clarus, we also go through and cleanse the SDR data on OTC FX Options. In truth, we are a bunch of Rates folk here at Clarus, and I’m not about to pretend to be anything other than an interested observer when it comes to Options space. But, with a hat-tilt (the Twitterati will like that…) to Polemic’s Pains, I went on a forensic search for 2×1 put spreads in the SDR data (this was before it started snowing in the Alps…). From his blog:
“If I had had the [requisite] lack [of] confidence in the Swiss national bank, then It would have looked a bit like this. Sell 1.2000 Eur puts Chf calls and buy twice as many 1.1750 or there about Euro puts choosing the period to make this 2×1 put spread at zero premium. The payoff being zero if no break but if there is to be a break I lose between 1.15 and 1.20 but make on everything below. The theory being that when pegs break they don’t mess around with 500pt moves instead jumping right over the loss zone into profit.”
In hindsight it sounds like a wonderful trade. The so-called free option. So was anyone out there wise enough to see this coming and put the trade on? Looking at the capital deployed this year so far, it doesn’t look like it. Below are all the puts struck below 1.20 this year:
If only that CHF200m put spread had been put on in the requisite 2×1 ratio that Polemic advises! Where’s that hand-slap meme when you need it? To be fair, in isolation the last three trades at least look nicely profitable for the buyers.
However….this Reuters article got me thinking. Apparently, positions were ramping up last year in exchange-traded CHF FX derivatives were they? We can see this in OTC space via SDR Researcher too:
With those significant volumes in November, I thought I should take the time to drill-down into these numbers. For a start, it’s clear that during Q4 2014, there was plenty of volume traded that matures post January 14th 2015. We can simply export this Q4 data from SDR Researcher into Excel and see what the expiries look like:
From which we can see that of the €37.2bn total that transacted, over 64% was still to reach expiry following the SNB’s shock withdrawal of the CHF-cap.
But of course, the strikes of these options are all-important. Therefore, using the same data, we can look at the total notional traded per strike during this time period:
From this data, it is pretty clear how shocking the move was. Out of the total notional traded, just 17% by volume had a strike lower than 1.20. And we can see that the total amounts traded per strike were much lower below the 1.20 SNB cap.
So finally, the last piece of the puzzle is to look at those potentially immensely profitable trades. Those traders who bet against central bank credibility. Specifically, those EURCHF options that expired after 14th January and had a strike below 1.20:
This is an even more limited universe of trades. By volume, they represent 12.5% of the total. And much as we saw in the data at the start of the blog, some will have been written as 1×1 put spreads versus strikes higher than 1.20, so we can’t even say for sure that these are the cream of the crop of the reported trades.
But….if you look hard enough, there’s always a winner, right? And I’m happy to say, 10th November turned out to be a prosaic day for one trader. Transacting the exact 2×1 put spreads that Polemic advised, we see a 3 month maturity and near-zero premium paid out:
I guess it shouldn’t be surprising that these positions were only put on in fairly small clips, and it looks like with a number of different counterparties. However, they represent over €75 million in notional in total.
For sure, at least one market participant raised a glass of Aigle Les Murailles to the SNB this past week. By our calculations, the intrinsic value alone is running at CHF5.5m…..