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FXO Market Update - Dec 15

Mathias-Alrixon-400x400
Mathias Alrixon

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.

15_MAAL_1
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.
15_MAAL_2
Source: Bloomberg, Blue: EURUSD spot

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

15_MAAL_3
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.

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