FXO Market Update - Feb 22
OTC Derivatives Trading
Summary: Market still nervous and all eyes on the Russia/Ukraine situation. Vols trades bid and there are high risk premium in EM and JPY vols while there are some currency pairs that looks cheap at these levels.
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.
Russia/Ukraine situation still the main focus that drives the market and the market still trades very nervous and headline dependent. FX spot still not doing much except RUB of course that is 7% weaker compared to start of the year and have been trading volatile in a 10% range during the first two months of the year. 1 month RUB vol currently trades around 40 vol compared to 15 at the start of the year and risk reversals trades around 12 vol when it normally trades below 4 vol. Spot moves have picked up a lot but realized is still only just above 20 vol so there is a huge risk premium at the moment.
G10 vols continue to trade bid even is spot not doing much. JPY vols and risk reversals are bid and trades with a considerable risk premium. Other high beta like AUD and NZD still trads bid but both trades close to fair value, implied and realized vol about the same.
Notable is other high beta like NOK and SEK trades below realized vol. EURSEK 1 month currently at 8.0 vol while realized at 9.75 vol. It has traded with a negative risk premium since beginning of December when spot started to trade higher. EURSEK spot trades close to the highest level in over a year and sit at interesting technical levels. A break above the resistance could accelerate the move higher while spot can quickly trade down to 10.20 if we get a risk on market again.
We like to buy EURSEK options here and sell USDJPY options to finance it.
Buy 1 month EURSEK 10.6000 put or call
Cost 950 pips
Sell 1 month USDJPY 116.00 call
Receive 50 pips
Spot ref.: 10.5950 and 115.25
- 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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Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.