FXO Market Update - July 20
OTC Derivatives Trading
Summary: Market started the week in risk off mode with equities down around 2% and commodities sharply lower. Commodity currencies like AUD, CAD and NOK were the worst performers with USDCAD up around 1.5% and vols trades bid with USDCAD 1 month up 1 vol. We like to sell into the spike in vol either by selling options outright or buy ratio call spreads for a continued move higher in USDCAD.
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.
Risk assets trades on the backfoot with equities starting the week trading down around 2%. US 10 year yield trades lower and trades below the 200 dma for the first time since November. USD trades bid and commodities trades sharply lower and commodity currencies like AUD, NZD, CAD and NOK were the worst performers yesterday.
USDCAD traded up around 1.5%, hitting 1.2807 high before trading lower at the end of the day. Vols are sharply higher with 1 month up from 7.25 to 8.25 which is the highest level since March and levels we only seen during short periods of time over the last year. Risk reversals trades bid as well, with 1 month up at 1.05 for USD calls which is the highest level in a year.
We see this as good opportunity to sell in to the spike in vol, either outright or buy ratio call spread for a trade higher in spot.
Sell 1 month 1.3000 USDCAD call
Receive 49 pips
Sell 1 month 1.2500 USDCAD put
Receive 22 pips
Buy 1 month 1.2800 USDCAD call in 1 mio
Sell 1 month 1.3000 USDCAD call in 2 mio
Cost 17 pips
- 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.