FXO Market Update - Nov 30

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

• 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 – An introduction

Forex Options – Exotic options