technical analysis

FXO Market Update - June 8

Mathias-Alrixon-400x400
Mathias Alrixon

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.

08_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.
08_MAAL_2
Source: Bloomberg, Blue: XAUUSD spot

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

Alternative

Buy 3 months 1950 XAUUSD call
Cost 3185 pips

Spot ref.: 1891.50

08_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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