Market makers last week were entering calendar spreads as a low cost method to gain exposure to a rising euro against the dollar. Thomas Devine, foreign exchange options trader at Dresdner Kleinwort Wasserstein in New York, said a popular trade was to sell one-week euro puts/dollar calls with strikes at around USD0.86 and buy three-week euro calls/dollar puts with strikes at around USD0.895. This allows the trader to gain exposure to a rising euro but not suffer from time decay caused by owning volatility. Time decay plays an important role in these options because the euro is appreciating slowly, he added. The euro appreciated against the dollar to USD0.8806 Wednesday from USD0.8755 the previous Friday. But one-month implied volatility remained stable at around 11.5% during the week.
Volumes were low across the options market, according to Devine, who added, "We are in the holiday season now and the volumes show that." The demand came from banks' proprietary trading desks and corporates hedging their exposure to the euro.
David Bloom, foreign exchange strategist at HSBC in London, agrees the euro is likely to appreciate against the dollar through the USD0.895 strike. The bank's three-month forecast is USD0.90. Bloom stressed the driving factor is negative dollar sentiment rather than positive euro news. He said, "Europe is boring and boring is good," adding, "the U.S. has a trade deficit and Japan a fiscal deficit."