OTC Derivatives Trading
Summary: The 0.6925-45 support in NZDUSD held for a third time on Friday. Spot traded up to 0.7100 today before the market turned in to risk off mode and spot is back down to 0.7000 again. We like to be long NZDUSD with a hawkish RBNZ and bullish commodity market and with a strong support level just below current spot. Vols are on the low end and we like to buy 3 months 0.7100 calls and finance it with selling short dated puts with strike close to the support.
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.
The 0.6925-45 support held for a third time in NZDUSD on Friday and we saw a strong bounce off the support after NFP as the dollar was sold off. We see a good chance for a move higher in spot from here with a hawkish RBNZ and bullish commodities. The 0.6925-45 area should continue to limit the downside and first resistance comes in at 0.7100 and then 0.7310 followed by the YTD highs at 0.7465. NZDUSD opened strong today and touch 0.7100 before trading lower as the risk appetite deteriorated, and the dollar traded stronger.
Vols trades at the low end looking at YTD data with 1 month at 8.9, compared to a YTD mean of 9.5 and a low of 7.70 and 1 month implied vol trades with a 0.5 vol discount to realized vol. 1 month risk reversal trades at 0.75 for puts and has been trading between 0.5 and 1.0 for the last 3 months.
We like to buy NZDUSD calls for a move up to 0.7300 and prefer to buy a bit longer dated to give spot time to get there. The call can be financed with selling short dated puts with strikes close to the support at 0.6945 and keep re-selling as long as they give a decent premium.
Buy 3 month 0.7100 NZDUSD call
Cost 82 pips
Sell 1 week 0.6950 NZDUSD put
Receive 13 pips.
Spot ref.:0.7000
Further financing can be done by doing a call spread, for example selling a 3 month 0.7300 would give 24 pips in premium which is around 30% reduction of the price if just buying the 0.7100 strike. We prefer to wait selling calls until spot has moved higher and selling puts with strike close to the support level does not give enough premium. For example, if spot trades at 0.7100, selling 1 week 0.7000 would only give 3 pips premium with the current volatility. At that point and depending on the market momentum we would consider selling a call instead of short dated puts. A 3 months 0.7300 call would give around 43 pips with current volatility and spot at 0.7100.
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.
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Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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