Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: Vols have picked up and EURUSD trades higher after a hawkish ECB last week. 1 month EURUSD is up 1 vol from end of January and currently trades at 6.5. 1 month risk reversal has flipped to favor calls after strong demand to buy EURUSD topside, 1 month RR trades at 0.25 for calls which is the highest level in a year.
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.
Volatility has picked up over the last weeks with rates in focus. Market is divided on how many hikes we will get this year and if there will be 25bp or 50bp hike from FED in March. ECB also delivered a hawkish statement last week which had EUR trade higher, EURUSD has traded up from 1.1150 to current levels around 1.1400.
Vols have picked up in general over the last weeks and EURUSD 1 month is up from 5.5 two weeks ago to currently trade at 6.5. The sharp move higher in EURUSD has spurred a demand for EUR calls which has flipped 1 month risk reversal from 0.4 favor EUR puts a week ago to now trade at 0.25 for EUR calls, which is the highest level in a year.
Spot has consolidated over the last days and market is now waiting for US CPI on Thursday, which will keep the front end vols supported for the next days.
We like to sell EURUSD calls with the higher vol and with the risk reversal at the highest level in a year. Either sell EURUSD calls, naked or as covered calls, or buy ratio call spreads.
Sell 1 month 1.1600 EURUSD call
Receive 23 pips
Alternative
Buy 1 month 1.1500 EURUSD call in 1 mio
Sell 1 month 1.1700 EURUSD call in 2 mio
Cost 30 pips
Spot ref.: 1.1400
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