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FXO Market Update - Jan 07

Mathias Alrixon

OTC Derivatives Trading

Summary:  EURNOK testing the 10.35 support and downside vol looks cheap after the selloff in December and the relative high risk reversal.

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: EURNOK spot, Black: Inverted Brent spot

EURNOK testing the 10.35 support after NOK steadily been trading stronger from the November lows. This is in line with the higher oil price and the improved risk sentiment.

Vols have traded lower as risk sentiment improves and EURNOK spot trades lower. 3 month vol is currently trading around 8.75 just above the lows seen in August and vol is currently trading with a negative risk premium of 1 vol, realized spot move is 1% higher than implied vol.

Risk reversals trades at 1.25 for EURNOK call which is just below the mean level over the last 6 months but about 0.5 vols higher than the lows back in August.

We see good value in owning downside options with the relatively low and cheap vol and high risk reversal. We prefer to be long a bit further out on the curve as the next leg higher in oil and risk sentiment might not happen before the vaccine rollout has reached a higher level of penetration.

Below are a few trade examples for lower EURNOK:

Buy 3 month 10.0000 EURNOK put
Cost 480 pips

The put can be partially financed by selling a lower delta call.

Buy 3 month 10.0000 EURNOK put
Sell 3 month 11.0000 EURNOK call
Cost 150 pips


Sell 3 month 10.3000 EURNOK put in 1 mio
Buy 3 month 10.0000 EURNOK put in 3 mio
Cost 50 pips

The strategy is close to zero cost with the risk there will only be a small move lower as the structure will be long 1 mio from 10.3000 to 10.0000, max loss of 3000 pips if spot close at 10.0000. The strategy will then be net short 2 mio below 10.0000 with a break even at 9.8475.

Spot ref.   10.3500

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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