technical analysis

FXO Market Update - Apr 06

Mathias Alrixon

OTC Derivatives Trading

Summary:  USD started the week to trade weaker with EURUSD moving up from 1.1740 to 1.1820. Vols are marked higher after the long weekend with EURUSD 1 month up from 5.50 to 6.10. Market has been short gamma above 1.1800 but we see more balanced positioning now and think vols will start drift lower again if the dollar does not start build momentum for a move lower.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

06_MAAL_1
FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
06_MAAL_2
Source: Bloomberg, Blue: EURUSD spot, Red: EURUSD 200 dma

USD traded lower yesterday with EURUSD trading up from 1.1740 to 1.1820. Next level to keep an eye on is the 200 dma that comes in at 1.1887 which we like to see break to confirm a move higher in EURUSD. USD index trades at 92.70 with 200 dma just below at 92.45 and we like to see the index trade below the 200 dma to confirm a broader dollar weakness.

Vol has been market higher after the long weekend with 1 month EURUSD vol up from 5.5 to 6.1. The risk reversal has moved higher over the last weeks as the market has been taken out of long topside gamma when barriers was taken out below 1.1800. 1 month risk reversal now trades at 0.1 for calls compared to 0.4 favor puts two weeks ago. We have started to see more balanced interest for the topside now and think most of the short gamma in the 1.1800-1.2000 area is covered. We see vols to start drift lower again after the initial buying after the long weekend as long as spot stay below the 200 dma. We like to sell strangles but keep them a bit skewed for the topside, with the call strike a bit further away from spot than the put strike.

Sell 1 week 1.1775 EURUSD put
Sell 1 week 1.1850 EURUSD call
Receive 40 pips

Alternative

Sell 1 month 1.1700 EURUSD put
Sell 1 month 1.2000 EURUSD call
Receive 56 pips

Spot ref.: 1.1810

06_MAAL_3
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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