FXO Market Update - Dec 10
OTC Derivatives Trading
Summary: GBP vol trades firm while EURUSD and rest of G10 vol trades a touch 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.
Hungary and Poland have agreed on a compromise with EU on the EU budget. Both HUF and PLN have lagged the recent rally in EM currencies, and we see particularly HUF has some catch up to do now when there is an agreement on the budget.
HUF trades stronger on the news with EURHUF down 0.75% on the day. A break of the 355 support could open up for a move down to 345.
Vols are a touch higher on the day and risk reversals trades unchanged, both vol and risk reversals trades around last months mean levels. We expect vols to trade lower now when one of the main risks are out of the way and with the holiday period coming up in a few weeks.
Sell EURHUF calls, either outright or as part of financing long put or put spreads.
Below are a few examples how to trade a stronger HUF.
Sell 1 month 365.00 EURHUF call
Receive 75 pips
Sell 1 month 365.00 EURHUF call
Buy 1 month 352.00 EURHUF put
Cost 48 pips
Buy 1 month 356.00 EURHUF put
Sell 1 month 360.00 EURHUF call
Sell 1 month 350.00 EURHUF put
Cost 28 pips
Spot ref. 356.60
- 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 - Webinars
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