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FXO Market Update - July 27

Mathias Alrixon

OTC Derivatives Trading

Summary:  USDZAR continues to trade higher with vols following spot higher, 1 month USDZAR vol up 0.75 from Friday and up 3 vol from the lows in June. Risk reversals are not following spot and vol higher and trades unchanged which makes USDZAR put relative expensive. Spot trades above the 200 dma for the first time since October, the 200 dma should now act as a first support on the downside. We like to sell short dated USDZAR puts with strikes around the 200 dma.

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: USDZAR spot, Black: USDZAR 1 month vol, Red: USDZAR 200 dma

FX continues to trade in it’s summer lull with just a few exceptions, spot is mainly range trading and vol trades at or close to YTD lows. ZAR still face a lot of headwind and USDZAR  is up close to 12% from its lows in June and hit 15.00 yesterday for the first time since end of March. Positioning still long ZAR which could add to the weakness as the market starts to cut their positions.

Vols trades higher in line with the higher spot, 1 month is up 0.75 vol from Friday and 3 vol from the lows in June. Risk reversals are not following higher and trades around the same levels as they done from the start of the year. 1 month risk reversal trades at 2.7 and has been trading between 2.5 and 3.0 for most of the year.

We see more rom for USDZAR to move higher and like to sell short dated USDZAR puts with the high vol and relative low risk reversal which makes the puts look over valued.

Spot trades above the 200 dma (14.7570) for the first time since October, this should act as a first support on the downside and comes in around the same level as the highs from mid-July.

Sell 1w 14.7500 USDZAR put
Receive 420 pips

Spot ref. 14.9100
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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