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BLOCK, Green June Call Fly

CABLE: Short-end GBP vols are rallying sharply over past few hours (alongside
spot), with the 2w implied vol measure hitting the best levels since Apr11 and
adding well over 1 vol point.
- The decline in shorter-dated vol over April has been among the sharpest falls
in recorded history. 2w vols have only ever fallen at such a rate on one other
occasion in data going back to the late 90s - the fallout of the referendum
itself. Interestingly, of the 25 sharpest monthly falls in 2w vols, 80% of those
were followed by a positive return within one month.
- This leaves medium-term GBP vols (3m and higher), capturing election risk and
extended Brexit machinations, looking historically under-priced. A 3m GBP/USD
straddle breaks even on an approximately 370 pip swing at expiry, less than half
the fluctuation required at the recent peak of implied vol just a few months
ago. The low base of implied vols also adds to the attractiveness of these
plays, with only a modest rise in implied vols required to increase the
profitability of positions.
- See email MNI MARKET ANALYSIS: GBP Vols - Too Far, Too Fast? for full details.
MNI London Bureau | +44 203-865-3809 |