FXO Market Update - May 4
OTC Derivatives Trading
Summary: AUDNZD spot bounced on the rising trendline support last week and is now testing the first resistance at 1.0800. Spot has built good momentum and traded higher after the previous bounces on the trendline and a break of 1.0800 could take spot up to the YTD highs at 1.0950.
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.
AUDNZD bounced sharply off the rising trendline last week. It is the third time spot rebound on the trendline and we have seen a good rebound from the lows the previous times. Levels to watch on the topside is 1.0800-05 area which if it breaks could add momentum to take spot back up to the highs from March at 1.0945. Spot made a first test of the 1.0800 resistance today but could not hold it above and spot is trading back below the resistance at time of writing.
1 month AUDNZD vol trades at 4.85 which is close to the mean level for YTD. AUD and NZD vols are generally overpriced at the moment, see top right graph below, but AUDNZD is the cross that trades closest to fair value with a risk premium of 0.4 vol. 1 month risk reversal trades flat which doesn’t give any side an extra premium.
We like to sell short dated puts as spot entry to buy spot on dips and/or buy a bit longer dated calls to give spot time to trade up to 1.0950 level. We don’t like to buy call spreads and limit the topside if spot would get the same momentum higher as the previous times it bounced on the trend line.
Sell 1 week 1.0750 AUDNZD put
Receive 10 pips
Buy 1 month 1.0850 AUDNZD call
Cost 35 pips
Spot ref.: 1.0780
- 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:
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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.