A record-breaking Aussie dollar/greenback double no-touch option traded Wednesday, which several dealers said was the largest trade of its kind and one of the largest ever exotic options. Carl Nabar, v.p. in foreign exchange options trading at AIG Trading in Greenwich, Conn., said the trade, which has a payout of AUD20 million (USD13.2 million), is the largest exotic option to hit the market in years. Typically single options trade with payouts of USD1-5 million, he explained, adding that anything over USD10 million is huge.
Several traders said Goldman Sachs' name was being bandied around in connection with executing the trade on behalf of an Asian central bank. Krishna Rao, executive director in fixed income, currency and commodities at Goldman in London, and Bruce Corwin, spokesman in New York, declined comment.
The option pays out if either of the barriers, set at AUD0.639 and AUD0.679, are touched before it expires on Nov. 7, according to the traders. The Aussie dollar was trading at AUD0.659 Thursday. Several dealers said the option has a theoretical value of AUD11.75 million, with the counterparty buying the option at a AUD6 million premium, for AUD17.75 million. Digital options typically trade higher than their theoretical levels, which are thought to understate volatility, explained one trader. It could not be determined what price the client paid.
Volatility on the Aussie dollar plunged after the trade, falling from 10.8% to sit at 10.1% Thursday with a further fall over the coming week likely. Jim Kamphoefner, foreign exchange options strategist at Bank of America in San Francisco, said that if spot stays within a tight trading range the seller of the option will continue to become long volatility, which will it will then need to sell. Meanwhile 25-delta butterfly options, which can be used to hedge range trades, will be better bid, added Nabar.
