Canadian dollar options offer value as event risk looms

By Fergal Smith
TORONTO, June 9 (Reuters) - Canadian dollar options offer
value after implied volatility, used by traders to price options
on the currency, cheapened and oil rose above $50, while events
loom that could trigger uncertainty in currencies over the
coming months, dealers said.
Corporate accounts and institutional investors use options
to hedge their currency exposure. Speculators also use them to
make bets on the currency. Their value tends to increase as
volatility in the currency rises.
Implied volatility for three-month options hit 9 percent on
Tuesday, its lowest this year, after trading at 11.5 percent
just over one month ago. It was at 9.45 percent on Thursday.
It has become cheap for importers to buy "protection" after
recent strengthening in the loonie, said Don Mikolich, executive
director, foreign exchange sales, at CIBC Capital Markets, who
advocates buying options with a three- or six-month maturity in
case the U.S. Federal Reserve raises rates in the coming months.
In addition to the Fed interest rate decisions, an upcoming
event that might trigger volatility in the currency market is
the UK Brexit vote later this month, dealers said.
Oil and stocks, which are major drivers of direction for the
risk-sensitive commodity-linked Canadian dollar, are sitting at
"big inflection points," said Patric Booth, head of trading at
Velocity Trade.
He thinks Canada's employment report on Friday may also
trigger a big move in the loonie if the data is negatively
impacted by the recent wildfires in Alberta.
The Bank of Canada has indicated that the economy likely
will shrink in the second quarter as a result of damage from the
wildfires before rebounding later in the year.
Booth has bought an option on the Canadian dollar that
expires after the employment data, hoping to benefit from a
spike in volatility.
Dealers agree that a buildup of long positions in the
Canadian dollar could add to volatility if the currency sells
off.
Speculators have established the largest net-long position
in the Canadian dollar in three years, data from the Commodity
Futures Trading Commission has shown.
Meanwhile, corporate accounts who sold implied volatility to
reduce their cost of hedging have taken advantage of the move
lower to buy it back, said Brad Schruder, director of corporate
sales and structuring at BMO Capital Markets.
In expectation that markets will remain uncertain, accounts
have been active on "minor dips" in volatility, he added.