A payout of more than 100 million euros ($106 million) may be beckoning for options investors if the German 10-year yield drops to zero in the aftermath of France’s elections.
German 10-year bunds currently yield about 0.30 percent, so a decline to zero would represent a significant increase in demand for haven assets. That would mirror moves seen after the U.K.’s Brexit vote.
As Le Pen's odds of victory in the French elections rises, so the spread between 'risky' France and 'safe-haven' Germany has soared...
And as Bloomberg reports, traders have been snapping up bund options at a brisk pace to gain from the potential possibility of National Front candidate Marine Le Pen becoming president. While the latest opinion polls show she is likely to lead the first stage of voting before faltering in the second round, the political shocks of 2016 have left traders on edge about the potential for more surprises.
Having detailed the various 'hedges' against a Le Pen victory earlier, one of the more popular trades set to benefit from a Le Pen victory however is seen in long-call calendar spreads on Bund Futures.
There are two parts to the trade. In the first section, the investor sells a call and a call spread expiring in April, betting that bund futures will slide going into the first round of election. In the second, the investor buys a call and a call spread betting that bund futures will rise by the end of May, covering the second round of the French vote on May 7.
The call that is sold to expire in April has a strike of 162.50, while the one bought for May has a strike of 163. The call spreads have the same strikes: 163.50 and 165.50. The maximum profit on the bought call spread is capped at 165.50, which equates to a yield of zero.
Premium of about 11 million euros has been paid on these exchange-traded options cleared through the Eurex platform, according to people familiar with the matter. If the bets play out to script, the trade will earn a gross profit of 114 million euros, leaving a net profit of about 103 million euros.
And most notably, as Bloomberg reports, the bulk of the trades are from a single investor, according to people familiar with the matter who asked not to be identified because they aren’t authorized to speak publicly.