FXO Market Update - Nov 30
OTC Derivatives Trading
Summary: Market ended last week in big risk off moves, with vols trading a lot higher in all currency pairs. USDJPY 1 month traded up from 7 to 8.75 on Friday and 1 month risk reversal traded from 0.25 to 2.0 for puts. We have seen some recovery at the start of the week as first indications about the new covid variant indicate mild symptoms.
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 week ended in big risk off move as the new coronavirus variant shaked the market. The move happened in holiday liquidity conditions as US returned from Thanksgiving. USD traded lower as equities and yields dropped. We saw the typical risk off moves where EM and high beta currencies like AUD and NOK were sold and JPY, CHF and XAU traded stronger.
Vols traded higher across the board with 1 month USDJPY up from 7.0 to 8.75, as spot dropped from 115.40 to 113.00, that is the highest 1 month vol since April last year. At the same time 1 month risk reversal traded down from 0.25 to 2.0 vols for USD puts. Market started the week positive as the reports over the weekend indicates the symptoms for the new variant so far has been relative mild. Equities have taken back about half of the losses from Friday and FX has stabilized and vols has started to come down from the highs but are still much higher than start of last week.
USDJPY 1 month is currently trading around 8.25 and risk reversal at 1.6 for puts, so still a lot higher than on Thursday last week. The next couple of days could be volatile as market will be sensitive to any headlines regarding the new variant. Vols could quickly trade back to levels from beginning of last week if we get more positive headlines over the next days.
Sell 1 month 112.00 USDJPY put
Receive 47 pips
Spot ref.: 113.70
- 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.