Buy USD/JPY 1y butterfly – Societe Generale

‘The Age of Jawboners’ – Forex Weekly note from Societe Generale takes note of the complacency in the USD/JPY market as represented by the absence of tail risk premium in the options and thus suggests buying USD/JPY 1y butterfly

Key points

The USD/JPY 1y butterfly is historically very low compared with 1y ATM volatility (largest historical dislocation in the universe of liquid G10 from 1m to 1y). We find no tail risk premium priced by the option market in the 1y butterfly compared to the spot distribution. This appears excessively complacent, given the uncertainty in US inflation developments (real yields), a possible correction in risky assets, and the potential Fed reaction. Buy USD/JPY 1y butterfly at 0.5, targeting 0.8, and with a stop at 0.4.