technical analysis

FXO Market Update - Oct 05

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  RBNZ rate decision tomorrow and market pricing 85% probability for a 25bp hike. O/N NZDUSD vol trades at 20.0 which is the highest level in 10 meetings. 1 week trades at 10.75 vol making the front of the curve very steep and we like to either sell the O/N outright or do a curve trade where we for example buy 1w and finance it by selling O/N to take advantage of the steep curve.


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.

05_MAAL_1
FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
05_MAAL_2
Source: Bloomberg, Blue: NZDUSD spot

Kiwi rate decision tomorrow and market is expecting a hike of 25bp to 0.5%, market pricing 85% probability for a hike. O/N vol trades at 20 vol which is the highest level in ten meetings, O/N for the meeting was this high at the May 2020 meeting the last time. At that time the whole vol curve was a lot higher due to the peak of the covid crisis. As comparison NZDUSD 1 month traded at 13 vol in May 2020 compared to 9.75 vol today. 20 vol equal to an expected move of 58 pips in spot over the meeting.

We think the O/N is priced on the high side when market pricing 85% probability for a hike and like to sell the front-end of the curve. Either sell O/N outright or buy a bit longer dated options and finance it by selling shorter dated options to take advantage of the steep vol curve, O/N trades at 20 vol while 1 week trades at 10.75 vol.

Sell O/N 0.6920 NZDUSD put
Sell O/N 0.6980 NZDUSD call
Receive 25 pips

Buy 1 week ATM put or call
Finance the bought 1 week by selling O/N 0.6920/0.6980 strangle, strikes 30 pips on each side of the bought option.
The structure would cost around 19 pips compared to 45 pips if just buying the 1 week.

Spot ref. 0.6950

05_MAAL_3
Source: Saxo Bank
  • 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.

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