FXO Market Update - Oct 19
OTC Derivatives Trading
Summary: Risk sentiment has improved over the last week and AUDUSD has trade higher after the surge in commodities. Spot is testing the highs from September and AUD calls looks cheap with vol relative low, a negative risk premium and a risk reversal that favor downside.
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.
Risk sentiment has improved over the last week, AUD and other commodity currencies have been the best performers with the surge in commodities over the last month. AUDUSD spot has traded up from 0.7200 at the beginning of the month and is currently testing the resistance from the highs in September at 0.7475, if it breaks it would give way for a move up to 0.7600 and then 0.7800.
Vols are trading soft with 1 month at 8.65, down 1 vol from the beginning of the month. Risk reversals trades a bit lower with the higher spot but still trades 0.75 for the downside, compared to 1.10 at the start of the month. 1 month vol trades with 0.6 discount to realized vol which makes AUD calls look cheap. We have relatively low vol and a negative risk premium and a risk reversal that favor downside. We like to buy AUD calls for a break of 0.7475.
Buy 1 week 0.7500 AUDUSD call
Cost 25 pips
Buy 1 month 0.7600 AUDUSD call
Cost 30 pips
Spot ref.: 0.7480
- 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.