Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: EURUSD has been range trading for the last two weeks but we have several important data points over the next weeks which could get spot start moving again. NFP tomorrow, ECB and USD CPI next week and FOMC in two weeks. Vol trades around fair value and we like to buy some optionality over all the events.
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 EURUSD rally that started in April has come to a stall as FED indicating they may start discussing tapering in the upcoming meetings. Market has reduced their positions and spot has traded around 1.2200 for the last two weeks.
There are a few important data over the next weeks with NFP tomorrow, ECB and US CPI on June 10 and FOMC June 16.
Vols have been trading sideways over the last month and implied vol currently trades at fair value, realized and implied are at the same level. Risk reversals does not show any sign of direction from here with front end risk reversals trading around flat.
We see this as a good opportunity to buy some gamma over the next weeks as all the data that will be released could shed some light on when the tapering might start and we could see volatility to pick up again. We still favor EURUSD higher long term, but short term over the events spot could go either way. We prefer to buy short maturities and 2 week, June 17, cover all the events.
Buy 2 week 1.2300 EURUSD call
Cost 27 pips
Alternative
Buy 2 week 1.2100 EURUSD put
Cost 30 pips
Spot ref.: 1.2190
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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