FXO Market Update - Feb 9
OTC Derivatives Trading
Summary: Vols have been sold off over the last week with most G10 vols back to pre-pandemic levels. The low vols offer good value to buy short dated USD puts if you think the weak USD momentum will continue.
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.
Vols have been sold off over the last week with front end vols been market down the most. Most of the G10 vols now trades back at pre-pandemic levels. EURUSD 1 month is down from 6.1 to 5.65 while USDJPY 1 month trades a bit higher today after the break of 105.00, but still trades close to multi-month lows.
USD has traded weaker over the last days with USDJPY trading down below 105 and EURUSD trading up above 1.2050. This opens up for further USD decline and short term move to 104 in USDJPY and 1.2200 in EURUSD.
Short dated directional trades are cheap with the low vol and if you think the weak dollar momentum will continue both long 1w USDJPY puts and EURUSD calls offer good value.
Buy 1w 1.2100 EURUSD call
Cost 31 pips
Buy 1w 104.50 USDJPY put
Cost 20 pips
Spot ref. EURUSD 1.2080, USDJPY 104.80
- 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.