OTC Derivatives Trading
Summary: USD trades lower as inflation fears fade again and USD index closing in on the year-to-date lows. USDCNH has traded down below the 6.4000 level for the first time since 2018 and vols have been paid up sharply over the last days and frontend risk reversals have flipped to trade for USDCNH puts.
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.
USD trades lower as inflation fears fade again and the dollar index closing in on the year-to-date lows. CNH spot trades stronger with US 10y down below 1.60 and CSI300 up over 3% today. USDCNH spot has traded down below the 6.4000 level for the first time since 2018 and the market is ready for a move lower, low from 2018 was 6.2360.
USDCNH vols are sharply higher today with 1 week up almost 1 vol and 1 month up 0.4. The risk reversal has flipped over to trade favor the downside in the frontend, 1 month risk reversal now trades 0.15 for USDCNH puts compared to 0.2 for calls yesterday.
Even if vols are higher over the last days we still trade below year-to-date average and we see vols to initially trade higher if spot can stay below 6.4000. We think put spreads or time spread where you for example buy 1 month and finance it by selling 1 week offer good value for lower USDCNH trades and both strategies take advantage of the last days move in vol and skew.
Buy 1 month 6.3900 USDCNH put
Sell 1 month 6.3400 USDCNH put
Cost 155 pips (6.3900 put cost 254 pips)
Alternative
Buy 1 month 6.3900 USDCNH put
Sell 1 week 6.4100 USDCNH call
Sell 1 week 6.3700 USDCNH put
Cost 100 pips
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.
Forex Options – An introduction
Forex Options – Exotic options
Forex Options - WebinarsAI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
