FXO Market Update - June 22

The FED’s pivotal hawkish move last week took the market by surprise and the dollar has traded higher across the board. The dollar has traded sideways over the last sessions and the market has started to put on trades for a reversal of the last week's move as they see risk for some dovish surprises now when FED has moved to a hawkish extreme.

Vol has reversed from the highs seen in the Asia session yesterday with both EURUSD and AUDUSD 1 month vol down more than 0.5 vol from the highs. EURUSD risk reversals have corrected a touch higher with 1 month currently trading at 0.25 for puts, compared to 0.4 yesterday and flat before FED. AUDUSD risk reversals still trades on the lows with 1 month at 1 vol for put, traded 0.5 before FED last week.

Below are a few short-dated trade ideas for a reversal of the resent dollar move in AUDUSD and EURUSD. We prefer to buy a bit shorter dated options and One Touch options offer good value for a reversal trade. You can buy a 2 week OT with barrier at the level where spot was before the FED for less than 20% in both EURUSD and AUDUSD.

Buy 2 weeks 1.2100 EURUSD One Touch
Cost 16.5%

Buy 2 weeks 0.7700 AUDUSD One Touch
Cost 17.5%

Vanilla alternative

Buy 2 weeks 1.2000 EURUSD call
Cost 18 pips

Buy 2 weeks 0.7600 AUDUSD call
Cost 19.5 pips

Spot ref.: 1.1885 & 0.7500

• 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