Midcurve euro$ vol
In the past two weeks EDM6/EDU6 spread has declined 1.5 bps, from 29 to 27.5. 2EU premium has been under constant pressure…two weeks ago the 2EU 9812 straddle was 37, now the 2EU 9825 straddle (next strike higher) is only 30/30.5 ref 9827.0. 2EU 9825c is 16/16.5 and 9837c 9.5/10.5.
When people say vol is “cheap to the curve”, I think this is a pretty good example. The roll of the curve in three months, as EDU6 rolls up toward EDM6 should be around 27.5 bps. This theoretical roll is worth nearly twice as much as the time decay of the call. In other words, the atm straddle is approximately equal to the 3 month calendar spread, (and actually there are 77 days until expiration for Sept midcurves). I’ve seen this happen many times in a very steep curve, but in a relatively flat curve, in what could be argued the most volatile segment when the Fed may be in play, it seems too cheap. As an aside, I’ve had pit market makers say that one of the larger local groups has been leaning toward heavy vol accumulation, and I have seen consistent (passive) buying of 2EZ 9800 straddle at 48 and 3EZ 9725 straddle 49.5.
Below is calendar spread EDM6/EDU6 .
