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.
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
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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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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