OTC Derivatives Trading
Summary: EURUSD has been stuck in a 1.2060/1.2180 range for the last two weeks. Current vol market offer good value for trading a break on the 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.
EURUSD has been stuck in a 1.2060/1.2180 range for the last 2 weeks. Spot is consolidating in wait for the last push on the Brexit negotiations which will be the main catalyst for the next move form here. We have FED rate decision tomorrow which we expect to keep a more dovish outlook compared to ECB which would support EURUSD, a surprise on the dovish side could have EURUSD test the topside of the range. A break up above the resistance level would open up for a move up to 1.2500.
Vols have traded sideways over the last week, supported by the uncertainty about the Brexit trade deal, despite trading in a relative tight range. Vol is still on the low end compared to the last 3 months. Risk reversals are trading around flat, down from 0.6 for EURUSD calls a week ago which makes EUR calls reasonably cheap.
Buy 2 week topside for a Brexit agreement before new year or/and buy 3 months topside for an extended positive EUR trend at the start of 2021. We prefer to buy a bit lower delta and not spend too much premium due to the downside risk on Brexit but want to keep the upside open and not limit the trade like in for example call spreads.
Buy 2 week 1.2250 EURUSD call
Cost 33 pips
Alternative
Buy 3 month 1.2500 EURUSD call
Cost 62 pips
Spot ref. 1.2150
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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