Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
OTC Derivatives Trading
Summary: Vols continue to trade lower as market trades in risk on mode. 1 month EURUSD at 8.0, down more than 4 vol from the highs last week. China vowed to keep stock market stable and USDCNH spot is back to where we started the week and 1 month vol back to 3.50 after it peaked at 4.80 on Tuesday.
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.
Market continue to trade in risk on mode and equity market rallied on the FED hike yesterday as FED wasn’t as hawkish as the market had feared. China equities rebounded after China state council vowed to keep the stock market stable earlier in the week. Talks between Ukraine and Russia continues and it looks like some progress are made.
Vols are continue to drift lower with EURUSD 1 month down to 8.0 and 1 month risk reversal trades at 1.25 for puts. USDCNH vols have erased all the gains from the start of the week, 1 month peaked at 4.80 and is now back to 3.50. USDCNH risk reversals has not adjusted as much with 1 month trading at 0.75 compared to 1.0 highs earlier in the week. HUF and PLN vols has been market lower over the last days with both EURPLN and EURHUF 1 month down 2 vol yesterday. Vols still at historically high levels with both 1 months at 13.5 while they normally trades between 6-8 vol.
Realized vol is still holding up as we still see quite big moves in spot. When looking at 1w realized, so we don’t include the volatile start of Russia's invasion of Ukraine. EURUSD 1 week realized is 11.25, 3 vol above 1 month implied. EURHUF and EURPLN both around 13.5 which is same as 1 month implied.
Scandies still holds the best value for long option positions with USDSEK 1 month vol trading 5 vol below realized. SEK spot moved 2% higher yesterday after hawkish comments from the Riksbank. We continue to favor long option positions in Scandies and also think its good time to look at long positions in EURUSD after implied vol has dropped more than 4 vol from the highs and realized still holding up. We think HUF and PLN vols have more room to move lower and like to keep small short vol positions.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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