FXO Market Update - Feb 10
OTC Derivatives Trading
Summary: EURPLN has broken down below the 4.5000 key support after NBP hiked on Tuesday followed by a hawkish statement. We have seen good demand to buy downside EURPLN options over the last days which has pushed vols higher and risk reversals 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.
Poland hiked with 50bp to 2.75% as expected on Tuesday. This was followed by a hawkish statement from Gov Glapinski iterating he see further tightening and the need for a stronger currency.
This had EURPLN break down below the key support of 4.50, which has held since June -21. We have seen good demand to buy downside EURPLN options over the last days with interests to buy strikes at 4.45 or lower in 1-3 month tenors.
Vols are trading higher with 1 month up 0.5 since the start of the week, currently trades at 6.25. The demand for downside as pushed risk reversals lower, 1 month trades at 0.5 for EURPLN calls compared to 1.25 at the end of January when spot was trading at 4.60.
We think downside options start to look a bit expensive after the last days shift in vol, ATM higher and risk reversals lower. We like to play the downside in EURPLN with covered put strategy. Sell EURPLN puts and keep a short spot position against it.
Sell 1 month 4.4500 EURPLN put
Receive 95 pips
Spot ref.: 4.4925
- 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.
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