Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
OTC Derivatives Trading
Summary: USD continue to climb higher and got another push higher yesterday as Biden nominated Powell for a second term as FED chair. Vols trades bid and risk reversals are better bid for USD calls. GBPUSD is testing the 1.3400 support again and we like to play any downside GBPUSD through ratio put spreads to take advantage of the high vol and risk reversal.
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 continues the climb higher after higher than expected US CPI last week and increased inflation fears. The dollar got an extra boost yesterday as Biden nominated Powell for a second term as FED chair, which was seen as the hawkish choice. USD is sharply higher over the last two weeks and the USD index trades at the highest level since July last year.
GBPUSD still hasn’t made a clean break of the 1.3400 support from end of September. Spot did another test yesterday without been able to build any momentum to the downside and spot currently trades just below 1.3400.
USD vols are higher in general over the last weeks with GBPUSD 1 month up from 6.85 to 7.75 over the last two weeks. All currency pairs trades with a positive risk premium after the last weeks surge in vol, with GBPUSD risk premium at 0.6 vol. There has been strong demand to buy USD calls which has moved risk reversals higher for USD calls. 1 month GBPUSD risk reversal trades at 0.9 vol for the downside, favor GBP puts/USD calls.
We like to play downside GBPUSD through ratio put spreads to take advantage of both the high vol and risk reversal. Alternative sell covered puts, keep a short delta position against it, or sell outright put if you think spot wont break down below 1.3400.
Buy 1 month 1.3350 GBPUSD put in 1 mio
Sell 1 month 1.3150 GBPUSD put in 1.5 mio
Cost 46 pips
The 1.3350 cost 106 pips on its own.
Alternative
Sell 1 month 1.3200 GBPUSD put
Receive 50 pips
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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.
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