FXO Market Update - June 24
OTC Derivatives Trading
Summary: EURHUF vols are higher as we have seen good spot moves over the last week as there were high uncertainties going in to the NBH rate decision earlier this week. 1 month vol is up from 5.25 last week to around 6.75 now. Vol has kept the bid tone after the rate decision, but we expect vol to come lower again now when spot has calmed down and vol supply start to come back to the market.
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.
It has been a busy last couple of days in EURHUF. Last week NBH said they might go with quarterly hikes, this had EURHUF move up from 345 to 355 as market had expected more frequent hikes. Then NBH hiked as expected this week but said we could see monthly hikes going forward and spot traded back to 350 and we are back in line with how the markets expectation looked like a week ago.
Vol has traded higher after more than a week with bigger daily spot moves than expected. 1 month vol is up from 5.25 low last week to currently trade around 6.75. We expect spot to calm down and vol to trade lower again now when the NBH event is over. It feels like the market has been taken out of a good amount of gamma and we have seen good demand to buy front end contracts after the rate decision. But spot should not be able to keep up the high volatility going forward after the market has readjusted their positions again. Vol should start trade lower from these levels as spot calms down and supply of vol comes back to the market. Risk reversals have traded lower over the last days with 1 month risk reversal now trading 0.45 for EURHUF calls, this is the lowest level in over a year. 1 month risk reversal traded at 1.0 before the rate decision.
We have a lower EURHUF bias as NBH delivered the more hawkish stance that the market originally expected. A first target is the 345-344 area, the low from earlier in June and the low from August last year.
We prefer to sell strangles or alternative buy ratio put spreads for directional trade lower.
Sell 1 month 355.00 EURHUF call
Sell 1 month 345.00 EURHUF put
Receive 175 pips
Buy 1 month 350.00 EURHUF put in 1 mio
Sell 1 month 345.00 EURHUF put in 2 mio
Cost 120 pips
You can finance the ratio put spread and sell a 355.00 call in 1 mio to make it close to zero cost.
Spot ref.: 350.20
- 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
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.