FXO Market Update - Oct 14
OTC Derivatives Trading
Summary: EURGBP spot has traded lower over the last two weeks and spot is down to the bottom of the last 6 months range at 0.8465. Vols are not doing much and are priced around fair value but risk reversals are on the high side considering spot testing the support.
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.
GBP has traded stronger over the last weeks with GBPUSD up from 1.3400 at the start of the month to trade just above 1.3700 at the time of writing. EURGBP has traded down from 0.8650 to current levels at 0.8465 during the same time. EURGBP spot is trading just above the 0.8450-70 support which forms the bottom of the last 6 months range.
1 month EURGBP vol trades at 5.10 which is just below the mean level for the last 6 months when spot been range trading. Risk premium trades close to flat, implied and realized vol are the same. Risk reversals trades on the high side considering spot at the low end of the range. 1 month risk reversal currently trades 0.45 for EUR calls and has been trading between 0.2 and 0.6 for the last 6 months.
A more hawkish BoE compared to ECB keeps GBP supported, but Brexit has done a comeback with the Northern Ireland protocol back in the headlines. This should not have any short term implications but could weight negative on GBP medium/long term if the disagreements are not solved.
We think vols could trade higher if spot breaks the 0.8450 level and risk reversals should be market lower if spot build momentum to the downside. While we don’t see much change in the vol curve if the resistance holds and spot goes back up above 0.8500. We prefer to buy EURGBP puts for a break lower and buy call spreads for a move back higher.
Buy 1 month 0.8425 EURGBP put
Cost 33 pips
Buy 1 month 0.8500 EURGBP call
Sell 1 month 0.8600 EURGBP call
Cost 28 pips
Spot ref.: 0.8465
- 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.