technical technical technical

FXO Market Update - June 15

Mathias-Alrixon-400x400
Mathias Alrixon

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.

15_MAAL_1
FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
15_MAAL_2
Source: Bloomberg, Blue: XAGUSD spot

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 24
00 pips

Alternative

Sell 1 month 30.0000 XAGUSD call
Receive 2
600 pips

Spot ref.: 27.7200

15_MAAL_3
Source: Saxo Bank
  • 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.

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