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
Alternative
Sell 1 month 30.0000 XAGUSD call
Receive 2600 pips
Spot ref.: 27.7200
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.
Forex Options – An introduction
Forex Options – Exotic options
Forex Options - WebinarsBond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
