Macro: Sandcastle economics
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FXO Market Update - June 01
Mathias Alrixon
OTC Derivatives Trading
Summary: AUDUSD stuck in range trading from the start of the year with last weeks trading in a tight range. Vols trades sideways but realized ticking lower with 2 weeks risk premium trades around 1.6 vol. We prefer to keep a short vol position in AUDUSD and short strangles are the preferred trade considering spot rage trading.
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.
AUDUSD continue to trade in the 0.7575-0.7950 range from the start of the year with the last 6 weeks in a narrow range, 0.7675-0.7875.
Vol trades sideways with 1 month around 9.0 vol for the last weeks while realized vol ticking lower as spot is stuck in the tight range. The 1 month risk premium is just 0.25 as we had a couple volatile days earlier in May but the 2w risk premium trades at 1.6.
We still prefer to stay short AUDUSD vol and selling strangles is the trade of choice given the well-defined range. We give two examples below, one strangle covering the range from the start of the year or a tighter strangle covering the range from mid-April.
Sell 1 month 0.7950 AUDUSD call
Sell 1 month 0.7600 AUDUSD put
Receive 44 pips
Alternative
Sell 1 month 0.7875 AUDUSD call
Sell 1 month 0.7675 AUDUSD put
Receive 78 pips
(Or receive 32 pips selling the 2w strangle)
- 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 - WebinarsLatest Market Insights
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