FXO Market Update - May 18

A high CPI print in Hungary last week was followed by hawkish comments from the NBH yesterday, a small hike in June can not be ruled out. HUF trades stronger and EURHUF took out the 355 resistance yesterday and traded down over 1%.

Vols are marked higher after spot breaking out of the range it has been trading in for the last 9 months. 1 month is up form 5.2 to 5.9 on the break and risk reversals are marked lower with 1 month now trading 0.70 for calls, down from 1.0 last week.

We think spot will calm down after the initial sharp move lower over the last days following the CPI last week and hawkish comment yesterday. A gradual move down to 344 is in the cards and 355 should now work as a good resistance.

We like to sell in to the spike in vol either by selling a strangles or short vol strategies with a bullish HUF view; covered puts, sell calls as spot entry trades if we would get a correction higher in spot or seagull structures where you buy ATM-ish EURHUF puts and finance it with selling strangles are a few suitable trading strategies

Sell 1 month 355.00 EURHUF call
Sell 1 month 345.00 EURHUF put
Receive 126 pips (call 84 pips, put 42 pips)

Alternative

Buy 1 month 350.00 EURHUF put in 1 mio
Sell 1 month 355.00 EURHUF call in 1 mio
Sell 1 month 345.00 EURHUF put in 2 mio
Cost 25 pips

Spot ref.: 350.20

• 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