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FXO Market Update - Apr 22

Mathias Alrixon

OTC Derivatives Trading

Summary:  AUDUSD spot has been trading in a 0.7550/0.8000 range since the start of the year while AUDUSD vols are the second most expensive in G10 with a risk premium of 1.25 vol, which is at the 88-percentile looking at 1 year historical data. Selling 1 month 0.7600/0.7900 strangle would give 54 pips premium.

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.

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.
Source: Bloomberg, Blue: AUDUSD spot

AUDUSD has been trading in a 0.7500/0.8000 range since the beginning of the year. Spot is currently sitting in the middle of the range around 0.7750.

Implied vols have gradually been trading lower since the sharp move lower in spot at end of February where we saw a big spike in vol. Realized vol has dropped quickly over the last month which makes AUDUSD vol the second most expensive after USDNOK, see top left chart below. The risk premium of 1.25 vol is the highest since late February and trades at the 88-percentile looking at 1-year historical data.

We prefer to stay short vol considering spot in the middle of the range and the high risk premium. There are no big events before the FED meeting in two weeks, which we don’t expect to have a major market impact.

Sell 1 month 0.7900 AUDUSD call
Sell 1 month 0.7600 AUDUSD put
Receive 56 pips


Buy 1 month 0.7600 AUDUSD call in 1 mio
Sell 1 month 0.7750 AUDUSD call in 2 mio
Buy 1 month 0.7900 AUDUSD call in 1 mio
Cost 54 pips

Spot ref.: 0.7750

A 1 by 2 call spread without the protective 0.7900 call would cost 24 pips.

Or you will get a close to zero cost strategy if you combine the two strategies, note the 0.7900 call is not needed in a combined strategy as they cancel out each other. The combined strategy would earn money if spot stay between 0.7600 and 0.7900, with a max profit of 150 pips at 0.7750, but with risk if spot would move outside 0.7600 or 0.7900.

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.

FX Options Trading:

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.

Learn more about FX Options:

Forex Options – An introduction

Forex Options – Exotic options

Forex Options - Webinars


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