FXO Market Update - Apr 29
OTC Derivatives Trading
Summary: USDMXN spot is back trading around 20.00 level and realized vol has gradually come lower over the last month while we have seen a pickup in implied vol over the last week. This has made USDMXN trade with a 4 vol risk premium, the highest since the US election, while spot been establishing a range around 20.00.
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.
USDMXN has traded lower over the last months, coming down from 21.5000 highs in February to now trade below 20.0000.
Vol has gradually traded lower as spot has moved lower. 1 month traded down to 11.00 2 weeks ago but has now traded back up to 12.00. This with spot ranging around 20.00 level which has had realized vol continue to trade lower and currently trade around 8.00. This gives a risk premium of around 4 vol which is the highest since the US election.
We see this as good opportunity so sell strangles to capture to high risk premium.
Sell 2 weeks 19.8000 USDMXN put
Sell 2 weeks 20.2000 USDMXN call
Receive 1850 pips
Sell 1 month 19.6000 USDMXN put
Sell 1 month 20.4000 USDMXN call
Receive 2450 pips
Spot ref.: 19.9200
- 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.