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FXO Market Update - May 13
Mathias Alrixon
OTC Derivatives Trading
Summary: Equities trades on the backfoot as market is concerned of the higher inflation and higher rates. AUDUSD is a good and relative cheap alternative to hedge your equity exposure than direct with equity options.
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.
Equities trades on the backfoot as market is once again concerned about the inflation outlook and higher rates.
AUDJPY and AUDUSD both have high correlation, above 75% over the last year, to the equity market and are commonly used as proxy hedges against a falling equity market. Hedging through FX options is a cheaper alternative than hedging direct through equity options but it doesn’t give a perfect hedge. It is a good alternative if you want to have some cheap options incase equities would fall further.
AUDUSD is cheaper than AUDJPY both when it comes to vol and the risk reversal. Buy low delta vanilla puts or One Touch options to the downside.
Buy 1 month 0.7400 AUDUSD put
Cost 15 pips
Alternative
Buy 1 month 0.7400 AUDUSD One Touch
Cost 18%
Spot ref.: 0.7715
- 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.
Learn more about FX Options:
Forex Options – An introduction
Forex Options – Exotic options
Forex Options - WebinarsLatest Market Insights
Quarterly Outlook 2024 Q3
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