FXO Market Update - June 15
OTC Derivatives Trading
Summary: XAGUSD has been unable to break up above the 28.25 resistance and spot has been rangebound for the last month. Realized vol is trading lower while implied vol is not falling as fast, making XAGUSD trade with a 6 vol risk premium. Risk reversals also trades with a high risk premium which makes XAGUSD calls attractive to sell either naked or as covered calls depending on your view on spot from here.
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.
Market continues to trade rangebound and there are not much of trends in spot looking over the last month. Realized vols are coming lower and implied vols are slowly following realized lower.
XAGUSD is no exception and has been unable to break up above the 28.2500 resistance after a strong rally in April and beginning in May. Spot has traded in a tight range between 27.25 and 28.25 over the last month. Realized vol has come down from 27 vol to around 22.5 vol over the last month while implied vol has traded lower as well but we have seen some buying interest in the market at the end of last week taking 1 month up over one vol. This has taken the 1 month risk premium up to 6 vol and 2 week risk premium to 9 vol, this makes XAGUSD the most expensive vol of all the currency pairs we are tracking by far.
Risk reversals have gradually traded lower over the last month but are trading on the high side compared to where ATM trades. The 1 month RR/ATM ratio trades as the 90% percentile seen over the last year making it very expensive considering spot is range bound.
We like to sell XAGUSD calls due to the high risk premium in both at the money vol and the risk reversal. Either sell naked calls or covered calls depending on your view in spot from here.
Sell 2 weeks 28.5000 XAGUSD call
Receive 2400 pips
Sell 1 month 30.0000 XAGUSD call
Receive 2600 pips
Spot ref.: 27.7200
- 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 - Webinars
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.