FXO Market Update - Jan 12
OTC Derivatives Trading
Summary: EURHUF has been trading within 354/369 range for over 3 months and currently trades in the middle of the range. Vols have traded higher as EM currencies have traded weaker over the last week with US yields and US spot trading higher. Sell 1 month strangle if you think spot will continue to trade in the range.
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.
EM currencies have traded weaker over the last week as US yields and USD spot have traded higher. EURHUF has traded back to the middle of the 354/369 range, which spot has traded within since start of September.
Vols have traded higher over the last week with 1 month EURHUF up to 8.0, the highest level since start of November and the risk premium has increased to 1.25 vol after the move higher in implied vol. Risk reversals have not moved much so far and trades steady around 1 vol for EURHUF calls. We like to sell in to the higher vol and selling a strangle is a good strategy if you think spot will continue to trade in the range.
Sell 1 month 355.00 EURHUF put
Sell 1 month 370.00 EURHUF call
Receive 175 pips
Spot ref. 360.60
- 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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