technical analysis

FXO Market Update - Jan 05

Mathias Alrixon

OTC Derivatives Trading

Summary:  XAUUSD started the year with a break higher. Vols starts the year bid but we see more potential for higher vols if spot would continue higher.


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.

05_MAAL_1
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.
05_MAAL_2
Source: Bloomberg, Blue: XAUUSD spot

The main theme for December was weaker USD trades and we see the same focus at the start of 2021. Main moves for the dollar over the last month have been against EM, metals and commodity currencies. Gold started December bouncing off the 1780 support and traded up to the top of the channel and then started 2021 with a clear break up above the resistance.

Vols jumped higher on the break, from relative low levels, with 1 month up 2 vol to 18.25. 1 month traded above 22 vol back in August when spot was on the highs. Risk reversals haven’t picked up on the break and trades around same levels as end of December, 1 month is currently around 1.5 vol for XAU calls, compared to 3.5 highs back in August. The risk premium is currently around 4 vol, but keep in mind that includes a few quiet days over the holidays which limit the realize vol.

We still could see vol move higher if spot continues higher even after the last day spike in vol. We see good value in the risk reversal at these levels, either buying calls and finance it with selling some puts or buying lower deltas call for a more bullish trade. Also call-flies offer good value for a less bullish trade with no risk except the premium paid for the structure.

Some trade examples for higher XAUUSD:

Buy 3 months 2100 XAUUSD call
Cost 2800 pips

Buy 1 month 2000 XAUUSD call
Sell 1 month 1850 XAUUSD put
Cost 1240 pips

Buy 1 month 1950 XAUUSD call in 1 unit
Sell 1 month 2000 XAUUSD call in 2 units
Buy 1 month 2050 XAUUSD call in 1 unit
Cost 1100 pips

Spot ref.  1941.80

05_MAAL_3
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.

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