Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: EURGBP spot is sharply higher over the last days and we have seen strong demand to buy options. 1 month EURGBP vol is up from 5.9 at the start of the week to 7.0 highs yesterday. This offers a good opportunity to enter short vol strategies as for example seagull structures.
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.
GBP has traded weaker over the last days where we have seen a larger move in EURGBP than in GBPUSD as EUR has been trading stronger at the same time.
We have seen strong demand for EURGBP options with 1 month paid up from 5.9 two days ago to 7.0 high yesterday. GBPUSD is up from 7.15 to 7.70 at the same time. Risk reversals in both EURGBP and GBPUSD has not moved much, considering the move in spot and vol, and are up just 0.1 for GBP puts in both EURGBP and GBPUSD. EURGBP 1 month currently trades at 0.60 for EURGBP calls.
It is a good opportunity enter short vol strategies after the aggressive move higher in EURGBP vol over the last days. Seagull structures are good short vol strategies that can be used for either a move higher or lower in spot. Buy at the money put or call, depending on direction, and sell a strangle to finance the bought option. Or alternative for a move back lower in EURGBP selling calls offer good value. If you think EURGBP will continue higher ratio calls spreads where you net sell vol are also a good alternative.
Buy 1 month 0.8635 EURGBP put or call
Sell 1 month 0.8500 EURGBP put
Sell 1 month 0.8750 EURGBP call
Cost 28 pips
The 0.8635 strike cost around 72 pips on its own
Sell 1 month 0.8750 EURGBP call
Receive 26 pips
Buy 1 month 0.8635 EURGBP call in 1 mio
Sell 1 month 0.8750 EURGBP call in 2 mio
Cost 20 pips
Spot ref.: 0.8630
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.
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