FXO Market Update - May 11
OTC Derivatives Trading
Summary: XAGUSD is up trading just below the 28.00 resistance and vols trades better bid with 1 month vol up around 5 vol over the last week. Risk premium trades around 6 vol which is the highest since the spike in February. We see good probability for a test above 28.00, covered calls or call spreads offer good value with the high risk premium and risk reversal.
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.
Vols are trading better bid over the last days as USD are trading weaker. Commodity currencies has traded stronger and XAG and XAU are among the top performers. XAGUSD has traded up just below 28.00 which has been good resistance over the last 9 months with just a few over shots. With the spike in the beginning of February was when XAG was targeted by the Reddit community. Spot has traded in a 22.00/30.00 range for 9 months with most of the time spent in the 23.00/28.00 range.
XAG vols have traded higher over the last week with 1 month up 5 vol to trade around 30 vol. Risk reversal is up 2 vol and trades at 5.50 for topside. The risk premium currently trades around 6.0 vol and is the highest we have seen since the spike in spot in the beginning of February.
We see a potential break of 28.00 and a move up to 30.00 with USD under pressure. Covered calls or call spreads offer good value with the high risk premium and high risk reversal. We like to buy ratio call spreads to take advantage of the high risk reversal and make the structure short vega.
Sell 1 month 30.00 XAGUSD call
Receive 22 pips
Buy 1 month 28.00 XAGUSD call in 1k
Sell 1 month 30.00 XAGUSD call in 1.5k
Cost 36 pips
Spot ref.: 27.4000
- 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.