technical analysis technical analysis technical analysis

FXO Market Update - Apr 27

Mathias Alrixon

OTC Derivatives Trading

Summary:  We have seen strong demand to own 1 year options in most EUR crosses after the 1 year has rolled over to include the French election next year. The high demand to own the election has widen the 9 months vs 1 year vol spread to trade at 0.4 vol. The 1 month forward vol starting in 11 months, covering the election, trades around 10 vol compared to 5.95 vol for the 9 month. The 1 year risk reversal has moved from trading flat to now trade 0.40 for the downside while the rest of the curve trades flat or small bid for topside.

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: EURUSD 9 month vol, Black: EURUSD 1 year vol, Red: EURUSD 9 month RR, Green EURUSD 1 year RR
Source: Bloomberg, Blue: EURUSD spot, Black: EURUSD 1 month vol,

We have seen very strong demand to buy 1 year EUR vol after the 1 year date has rolled over to include the French election next year. The election in 2017 had a lot of uncertainty for the political landscape and we saw some good move in both spot and vol around and after the election. The market is already now starting to position itself for the next election which has resulted in strong demand for down side EUR options in most EUR crosses.

The first chart above shows the EURUSD 9m and 1y ATM vol and the 9m and 1 year risk reversal. We can see the divergence started 2 weeks ago when the 1 year rolled over to include the first possible first round election date. Last week we had another move in 1y vol as the 1y rolled over the be guaranteed to include the first round.

The spread between the 9m and 1y vol is currently trading at 0.40 vol and the spread for the risk reversal is about the same with 9m trading flat and 1y trades 0.40 for EUR puts. The big spread for the 9m vs 1y vol result in a very high forward vol for the election. The 1m forward vol starting in 11 months and expire in 12 months and include the first round of the election, trades just above 10 vol compared to a 6 vol for the 11 months, not including the election.

The second graph above shows the EURUSD spot and 1 month vol for 1 Mar-30 May 2017, including the first round on 23 April and the second round of the election on 7 May. 1 month EURUSD traded at 13 vol before the first round with high uncertainty for the outcome. Spot then rallied 200 pips and vol dropped to 8 vol as the result of the first round left the right wing with a very low probability to win the election.

ERUUSD 1 year vol trading around the mean level when looking at data after the US election where 1 year traded down from 7.0 before the election to a low at 6.0 in February. We think the risk premium is too rich with one year left to the election and see good opportunities to buy short vega directional trades to the downside to take advantage of the high risk reversal and risk premium. Ratio put spreads or Reverse-Knock-Out puts where you sell vol and benefit from the risk reversal offer good value.

For example, 1 year 1.2000 put cost 6.8 vol and you receive 7.5 vol for selling the 1.1200 strike.

Buy 1 year 1.2000 EURUSD put in 1 mio
Sell 1 year 1.1200 EURUSD put in 2 mio
Cost 124 pips
1.2000 strike cost 240 pips


Buy 1 year 1.2000 EURUSD put with RKO at 1.1200
Cost 58 pips
Knock-out options are not available on the platform but offered over voice. Contact your sales or RM representative for requirement and availability in your region.

Spot ref.: 1.2075

If you like to finance the downside strategies by selling calls in the 1 year, you can sell a  1.2650 call against the put spread or a 1.3100 call against the RKO to make the strategies around zero cost. Alternative you can sell 1.2450 or 1.2800 strikes in the 9 months and avoid the election risk to make the strategies around zero cost. The duration and vol is lower so strikes will be 200-300 pips lower.

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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