FXO Market Update - May 20
OTC Derivatives Trading
Summary: EURNOK spot has traded higher over the last weeks on back of a lower market risk sentiment. EURNOK vols have gradually traded higher while the spot move higher has been relative slow, this has made the risk premium to increase and put EURNOK vol as the most expensive in G10.
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.
Last days lower risk appetite has put some pressure on the higher beta G10 currencies like NOK. EURNOK has traded up from 9.90 at the beginning of the month to now trade at the top of the trend channel around 10.10.
EURNOK vols have gradually traded higher over the last weeks with 1 month up 0.5 vol yesterday and 1.5 vol from the beginning of the month to now trade at 8.70. Realized vol has not increased as much as the implied as the move higher in spot over the last month has been relative slow. This has made the risk premium to increase and put EURNOK as the most expensive vol in G10, see top left chart below. The 1 month risk premium trades at 1.00 vol which is just below the year to date high of 1.10. Risk reversals trades a touch higher as well with spot at the top of the range, 1 month is up 0.2 over the last week to 1.25 for calls.
We still have a positive view on NOK with NB as one of the most hawkish central banks. Risk is if the market risk sentiment continues to deteriorate, which could cause a breakout of the trend channel. We still see good value selling EURNOK calls considering the high vol and risk premium and a relative high risk reversal.
Sell 1 week 10.2000 EURNOK call
Receive 155 pips
Sell 1 month 10.4000 EURNOK call
Receive 240 pips
Spot ref.: 10.1075
- 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.