Long EUR Calls - Too Cheap To Ignore

The EURUSD (ETF Ticker : FXE) has been under significant pressure for the last 2 months as the outlook for growth, stability, and leadership out of the EU has been disappointing at best. Rates/CDS on sovereigns, equity valuations in the EU, and liquidity metrics (libor, EUR basis) are still showing signs of stress, but have rebounded off recent extremes.

The EUR should benefit if economic conditions improved as expectations of a break-up of the Euro-zone and/or the ECB doing a round of Quantitative Easing would decrease.

An interesting trade is the FXE Jan 131 calls for $0.70 (11.9 vol). If FXE retests the 50 day moving average ($134.3) then that option will be worth $3.3+. I think 11.9 implied volatility for FXE is too cheap based both on historical price action and the uncertainty around the ECB actions / Euro-zone crisis. If volatility goes from 11.9 to 12.9 while everything else is constant, the option will increase by $0.11 (16%).

Included below is a historical price / implied volatility chart and a regression of SPY vx FXE. Note the correlation of FXE to SPY is around 60, so betting on FXE trending higher with SPYs is probable.


FXE Historical Price / Volatility Chart


FXE is oversold, testing the 2 standard deviations from the 50 day moving average.



FXE Regression vs SPY - 60 correlation