Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: Vols continue to drift lower, and most currency pairs are trading at or close to year-to-date lows but are still trading a fair bit above the pre Covid lows seen at the start of 2020. Most of the currency pairs are trades around fair value with USDRUB the only that trades with a significant risk premium.
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.
The spike in vol that we saw after the FED rate decision has been erased and vols continue to slowly drift lower. Most of the currency pairs trades at or close to year to date and post pandemic lows but there is still plenty of room to go to get down to the pre pandemic lows at the start of 2020. EURUSD 1 month currently trades at 5.25 and traded as low as 3.8 in January 2020, USDJPY trades at 5.3 compared to 4.25 in Jan 2020.
Many of the currency pairs trades close to fair value, implied and realized vols trades at the same levels. The notoriously overpriced RUB vols are the most overvalued vol at the moment with USDRUB 1 month risk premium at 1.75 vol, which is right at the 1 year median level. USDRUB spot has traded lower over the last months and are back down to the lows again after a spike higher around the FED announcement two weeks ago. 1 month risk reversal trades at 2.5 which is at the low end of the last year range of 2.0-3.75.
We prefer to sell USDRUB calls here with the high risk premium, a 2.5 risk reversal for calls and also a positive carry of 3000 pips.
Sell 1 month 74.0000 USDRUB call
Receive 4420 pips
Spot ref.: 72.4100
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.
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