The LTRO 2 is the iPad 3 of the financial markets. Everyone thinks they have an inside scoop, everyone has an opinion and everyone is pinning their hopes on a good release.
But what exactly is a "good release"? We have reached a few conclusions.
1. Given the vast differences in opinion in the market, we cannot place a consensus on any data point other than that between EUR400bn and EUR550bn is likely the "goldilocks" level and would be moderately bullish for risk.
2. A result of conclusion 1. is that we cannot position directionally outright.
3. However, this is not to say that we anticipate a simple binomial event. Indeed, we believe there to be significant skew in expectation, dragging us into a moderately bearish stance as all technicals and "canaries in the coal mine" point to a thin market that can be catalysed easily to the downside.
Taking 1.,2. and 3. into account we have bought EURUSD puts, strike 1.31, at a cost of a meagre 25pips reflecting our view that an outlying number in either direction is not priced into volatility and could trigger a domino sell off.
Paying heed to the upside, we have kept this cost to a minimum and assign a 20% p(success) with an average of a 200pip gain.
E(trade) = 0.2*200 - 0.8*25 = +20pips
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