FXO Market Update - Feb 4
OTC Derivatives Trading
Summary: EURPLN vol trades higher after the break of 4.50. NBP left rates unchanged yesterday and stated that they do not rule out further intervention to control the PLN appreciation. We see good value in selling EURPLN puts here after the move lower in spot and pick up in vol as further appreciation in PLN most likely will be gradual and limited.
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.
PLN has traded stronger over the last week with EURPLN trading down below 4.50 from 4.55 a week ago. NBP left rates unchanged as expected yesterday and stated that they do not rule out further intervention in the FX market if PLN would appreciate to fast. We do not expect to see as aggressive interventions as back in December when EURPLN went from 4.50 to 4.60, but we expect NBP to control the speed of any PLN appreciation. Any further move lower in EURPLN from here will probably be gradual.
Further down the road we also have the mortgage conversion plan that will put pressure on PLN, timing on this is unknown and we don’t know if NBP will help support the market, we expect to get more information within the next couple of months.
Vols has traded higher over the last week with 1 month up from 5.0 to 5.65 as spot broke down below 4.50. Risk reversals has moved a bit lower with 1 month down from 0.85 to 0.75 favoring topside.
We see good value in selling EURPLN puts after the move lower in spot and pick up in vol as further move lower in EURPLN will most likely be gradual and limited.
Sell 1 month 4.4600 EURPLN put
Receive 100 pips
Sell 2 weeks 4.4800 EURPLN put
Receive 100 pips
Spot ref. 4.4960
- 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.