Citibank is recommending corporates buy dollars against the Swiss franc because the options are cheap because the market is positioning for further dollar depreciation against the Swissie. T.J. Marta, foreign exchange strategist at Citigroup in New York, said demand for Swiss franc calls means now is a good time to buy dollar calls at low premiums. The one-month 25-delta risk reversal shows a 1.25 bias in favor of Swiss calls/dollar puts. There have only been two other occasions, the collapse of Long-Term Capital Management in 1998 and the introduction of the euro in 1999, when dollar/Swissie risk reversals have been this skewed in the last nine years.
To take advantage of the situation Citibank is recommending clients enter a bullish dollar ratio seagull, according to Marta. In the trade the investor sells a dollar call/swiss put struck at USD1.7725 and purchases a USD1.7075 dollar call. At the same time the investor sells a USD1.6960 dollar put, which is half the size of the other two options. Spot was trading at USD1.7080 when this trade was designed Monday. Marta said it chose the USD1.7725 strike because that is the bank's three-month forecast for the currency pair and it arranged the lower strikes so that it would be able to offer it as a zero premium trade.
This trade would typically be taken out by a corporate with exposure to dollar appreciation against the Swiss franc, according to Marta. He added it is usually executed in multiples of USD10 million.
