FXO Market Update - June 8
OTC Derivatives Trading
Summary: XAUUSD had an aggressive sell off last week but the support at the trend channel held and spot has bounced back up over the last days. Vols trades just above one year lows and risk reversals are down around 1% over the last week. We see this as a good opportunity to buy XAU calls.
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.
Gold has been trading higher over the last two months, trading up from 1700 to current levels just below 1900. We had an aggressive sell off in spot last week, but the trend channel held again and spot has bounced back over the last days.
1 month vol currently trades around 12.5 and is down 2 vol from the highs in mid-May. Vol trades on the low side with 1 month trading just above the one-year lows and implied trades close to fair value, implied and realized vol are the same.
Risk reversals have traded lower over the last week as spot temporarily halted its move higher. 1 month risk reversal trades at 0.4 for calls, compared to 1.25 back in May when spot traded up above 1900 for the first time.
We see this as a good opportunity to enter new long positions with a first target at the double tops at 1955-65 area and then the highs from August at 2075. Vol and risk reversal is low, so we like to keep it simple and just buy calls.
Buy 1 month 1925 XAUUSD call
Cost 1585 pips
Buy 3 months 1950 XAUUSD call
Cost 3185 pips
Spot ref.: 1891.50
- 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.
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