J.P. Morgan is recommending clients buy Korean won puts/dollar calls to capture volatility as the won sinks lower against the dollar, following a slump in the global technology sector. "The best thing to do is buy outright volatility," according to Louis Cucciniello, head of options in the Lion City. "Now's not the time to get fancy," he added. Cucciniello recommends buying volatility through options and avoiding using structures, such as call spreads, that would limit the upside potential.
The firm suggests buying three-month U.S. dollar calls/Korean won puts, struck at KRW1,315. The premium for the trade is 1.7%. The trade was first recommended when spot was at KRW1,291 on Sept. 19. Even though the won had weakened to KRW1,310 on Tuesday the firm is still recommending the trade as it predicts the currency pair will reach KRW1,340 by year-end. Cucciniello explained that the terrorist attacks in the U.S. and the global slowdown in demand for technology products weakened the equity markets. The technology sector is the mainstay of the Korean economy and its fall will push the won higher, he added. As there is ample liquidity in the Korean market, no specific notional size is recommended, he added. The trade is not targeted at any particular players. The straightforward nature of the trade means volatility players can easily enter it.
Cucciniello said greater volatility in the equity markets worldwide would lead to an increase in implied volatility on the currency pair. He added that Korea is often used as a proxy for the Nasdaq Stock Market, because of its strong correlation to the technology industry. The three-month timeframe was selected because it is the cheapest part of the curve and is long enough to show the trend and not be affected by jumps in volatility caused by short-term repercussions of the terrorist attacks in the U.S.
