FXO Market Update - Nov 2

USDMXN is sharply higher after lower growth number last week and fear of a hawkish FED tomorrow. Spot has traded up more than 3% over the last week and currently trades just below the October highs at 20.8400.

Vols have spiked higher over the last days with 1 month up 1.75 vol from Thursday last week, currently trades around 11.0. The spike in vol has made the risk premium to trade up to 1.75 vol over the last days. Risk reversals has followed spot and vols higher, 1 month risk reversal is up from 2.0 to 2.4 over the last days.

A more dovish FED could get some relief to EM and MXN and we could see USDMXN trade back lower. USDMXN calls are considerably higher over the last days, a 1 month 25 delta call trades at 12.50 vol which is 3 vol higher than realized spot vol. 

Sell 1 month 21.50 USDMXN call
Receive 1,000 pips

Spot ref.: 20.8400

• 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