technical analysis

FXO Market Update - Feb 11

Mathias Alrixon

OTC Derivatives Trading

Summary:  Vols continue to trade soft but risk reversals have not been marked lower in line with the selloff in AMT vols for all currency pairs. This opens for some trade opportunities in for example USDMXN.


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.

11_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.
11_MAAL_2
Source: Bloomberg, USDMXN spot

Vols continue to trade offered with equities grinding higher as market trades in a risk on mode. Vols are trading lower in a weighted fashion where short dated are marked lower more than the backend vols.

While ATM vols trades offered we see skew trade lower as well, but the selloff in the skew is lagging in some currency pairs. Taking a closer look at USDMXN, we can see that the 1 month risk reversal vs ATM vol ratio trades at historically high levels. Meaning that the risk reversal is very high compared to where the ATM vol is trading. This ratio has only been higher during the US election in 2016 and during the peak of the pandemic in March/April last year and just on a few other short periods since 2016.

This means that USDMXN calls are priced very high compared to ATM and USMXN puts trades with a big discount compared to ATM.

Depending on your view on USDMXN. Buying USDMXN puts or selling calls, either on its own or as a risk reversal, takes advantage of the current expensive skew for a trade lower in USDMXN. If you think USDMXN will trade higher then call spreads offer good value.

Lower USDMXN:

Buy 1 month 19.9000 USDMXN put
Cost 1950 pips

Sell 1 month 20.8000 USDMXN call
Receive 900 pips

 

Higher USDMXN:

Buy 1 month 20.2000 USDMXN call
Sell 1 month 20.8000 USDMXN call
Cost 1675 pips

Or cost 750 pips if done with a 1 by 2 ratio.

Spot ref. 19.9950

11_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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