FXO Market Update - Mar 25
OTC Derivatives Trading
Summary: XAUUSD has consolidated in relative tight range over the last week and we have seen vol trade lower. Both vols and risk reversals trades at low levels and implied vols trades at a 3 vol discount to realized vol. This makes XAU calls to trade at very low levels and gives 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 consolidated around current levels of 1730 after been trading down over 10% since the highs at the start of the year. Current open futures contracts are at the lowest net long position since back in June 2019. Yields have stabilized and the market has added to the long future position for the first time in 2 months.
Vols have drifted lower over the last month as spot has been consolidating in a tight range. 1 month trades at 13.20 and 3 month at 15.00 which are just above the lows in July last year. 1 month implied vol trades with a 3 vol discount against the realized vol, this is the highest discount in over 6 months. Risk reversals are also on the lows with 1 month 0.25 for downside and 3 month 0.8 for the topside. We only seen the risk reversal at lower levels during short period of times earlier in March this year when spot dipped down below 1700 and back during the peak of the pandemic in March last year.
XAU calls have not been this cheap for a long time, low ATM and risk reversal and high discounts on implied vs realized vol, which makes it a good opportunity to buy some XAU calls for a turnaround in XAU spot.
Buy 1 month 1770 XAUUSD call
Cost 1425 pips
Buy 3 month 1800 XAUUSD call
Cost 2970 pips
Spot ref.: 1732.50
- 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.