FXO Market Update - Jan 28

A slightly dovish FED was not enough to support the market and market continued to trade in a risk off mode with US equities down over 2%.

USD trades stronger while EM and risk correlated currencies like AUD trades weaker. AUDUSD spot is down 2% over the last 24 hours and currently trades around the 0.7600 support.

Vols have been paid up significantly over the same timeframe with 1 month up from 9.75 to 11.00. Risk reversals moving more for AUD puts with 1 month at 1.40 for downside.

Vols have traded up to the highest level since the US election but there is still room for vols to go higher if we can break down below the 0.7600 level and the 50 days moving average at 0.7585. We see good demand to buy downside hedges but at these levels we see better value in buying put spreads or RKOs, Reverse Knock Out options, for a move 2-3% lower over the next month.

Buy 1 month 0.7600 AUDUSD put in 1 mio
Sell 1 month 0.7350 AUDUSD put in 1.5 mio
Cost 63 pips
1 month 0.7600 cost 94 pips on its own.

Alternative

Buy 1 month 0.7600 AUDUSD put with RKO 0.7350
Cost 25 pips

Spot ref. 0.7600

The RKO has a knock out barrier at 0.7350. The option will be knocked out and the buyer lose the right to sell at 0.7600 if spot would trade at the barrier at any time before expiry. We offer RKOs in selected markets over voice trading, barrier options are not tradable on the platform.

• 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