FXO Market Update - Mar 30
OTC Derivatives Trading
Summary: EURPLN trades higher as a very serious third COVID wave hits the country. Add to this a dovish central bank and the CHF mortgage conversion. Spot has taken out the highs from March last year and trades at the highest level since 2009. 1 month vol is up close to 3 vol over the last month and trades with a risk premium of close to 2.5 vol which makes it the most expensive vol. Risk reversal trades on the highs which makes covered calls and call spreads good value for further move higher in EURPLN.
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.
PLN continue to trade weaker as a very serious third COVID wave is hitting the country and more restrictions are put in place. Add to this a dovish central bank and the CHF mortgage conversion. The next important date to keep an eye on is April 13 when the Supreme Court will present its stance on the mortgage conversion.
EURPLN is up close to 5% over the last month when spot started to move higher from the 4.50 area. Spot has taken out the highs from March last year and trades at the highest level since 2009.
Vols trades higher with 1 month up at 7.85 compared to 5.25 low in February. Vols are back at levels seen during the aggressive intervention from NBP in December but still not close to the levels we saw back in March last year. Spot has steady grinded higher which has only added 1 vol to realized vol from February, this makes EURPLN 1 month trade with a risk premium of almost 2.5 vol which makes it the most expensive vol at the moment.
Risk reversals trades higher with 1 month up from 0.75 lows in February to 1.6 at time of writing and are closing in on the highs form last year.
We still see room for EURPLN to trade higher and prefer to sell covered calls or buy ratio call spreads with the high and expensive vol and elevated risk reversal.
Sell 1 month 4.7500 EURPLN call
Receive 145 pips
Keep 50-100% long spot position depending on conviction.
Buy 1 month 4.7000 EURPLN call in 1 mio
Sell 1 month 4.8000 EURPLN call in 1.5 mio
Cost 180 pips
Spot ref.: 4.6600
- 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.