Level 1.34 has been crossed.


I - The situation :

EUR / USD decreased to 1.3280, sold by investor's woes on european economy.




II - The strategy :

I had choosen in a arbitrary way a bearish direction on the EUR / USD, that the dollar should strengthen against the EUR.
The butterfly spread is built as it follows:

DEC 28 Expiry:
- The purchase of 300000 calls struck at 1.34 for $0.0230 each ( Implied Volatility 16.59% ) hence a debit of $ 6900
- The short selling of 600000 calls struck at 1.32 for 0.0169 each ( Implied Volatility 16.72% ) hence a credit of $ 10140
- The purchase of 300000 calls struck at 1.30 for $ 0.0138 ( Implied Volatility 17.86% ) hence a debit of $ 4140

Global debit : $ 900



III - Pricing :




300000 1.34 puts are worth 0.0266 each ( Implied Volatility de 14.65% ) hence $ 7980 ( $ + 1080 )
600000 1.32 puts are worth 0.0183 each ( Implied Volatility 15.71% ) thus $ 10980 ( $ - 840 )
300000 1.30 puts are worth 0.0115 each ( Implied Volatility 16.09% ) hence $ 3450 ( $ - 690 )

Global P&L : + 1080 - 840 - 690 = $ - 450



IV - Graph :




Adjustment Pricing :
Our adjustment was :

Selling 300000 dec 1.34 calls for $ 7980
Buying 200000 dec 1.36 calls at 0.0317 for $ 6340.

It's now worth :
- 300000 1.34 puts at 0.0266 thus $ 7980$ (-1140)
- 200000 1.36 puts at 0.0385 thus 7700$ ( + 1360)

A profit of $ + 220.






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Gilles