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FXO Market Update - Jan 26

Mathias Alrixon

OTC Derivatives Trading

Summary:  USDRUB is up 3.5% from the lows last week as political tensions increases after the arrest of Navalny. Spot trades just below the resistance levels at 76.00 and ratio put spreads or put-flies are cheap strategies for a move back lower in USDRUB.

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.

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.
Source: Bloomberg, Blue: USDRUB spot

USDRUB has traded up to the highs from December as political tension increases after the arrest of Navalny. Market is waiting for any potential sanctions from the new US government that has said they have no plans to improve relations with Russia.

Spot is up 3.5% from the low last week and is currently testing the resistance at 76.00 which is the highs from December. RUB is one of the favorable long EM currencies with the higher oil and commodity prices, but we see short term risk to the topside depending how the current situation unfolds.

Vols have traded higher with 1 month USDRUB up from 13.75 last week to 15.25 today. The risk reversal has followed higher with 1 month up 0.25 to 3.5 for topside.

We are cautious selling any options to the topside with risk of USDRUB to continue higher if the political tensions worsen or US put some heavy sanctions on Russia. Instead we like to put on some cheap downside strategies if RUB would turn around and trade stronger again. 1 by 2 put spreads or put-flies are cheap strategies which also take advantage of the higher vol.

Buy 1 month 75.5000 USDRUB put in 1 mio
Sell 1 month 74.0000 USDRUB put in 2 mio
Cost 2,000 pips
1 month 75.5000 put cost 12,500 pips on its own.

Or with no risk on the downside.

Buy 1 month 75.5000 USDRUB put in 1 mio
Sell 1 month 74.0000 USDRUB put in 2 mio
Buy 1 month 72.5000 USDRUB put in 1 mio
Cost 4,400 pips

Spot ref. 75.5000


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.

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.

Learn more about FX Options:

Forex Options – An introduction

Forex Options – Exotic options

Forex Options - Webinars


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