FXO Market Update - Oct 26

EURSEK is testing the technical and psychological support at 10.00 again. We have seen a couple of tests over the last 2 weeks, but spot has been unable to break and build momentum to move lower. A break would open for a move to 9.50 and potentially lower, which is levels we haven’t seen in several years.

Vols have traded sideways since the beginning of the summer with 3 months vol ranging between 4.5 and 5.0, currently trades 4.85. High from the beginning of the year is just above 7.0 and the current levels of 4.85 for the 3 months vol is at the low end when looking at the years before the pandemic as well. Risk reversals trades at the low end of what we have seen since the beginning of the year with 3 months currently trading at 0.55 for EUR calls, but the current risk reversal levels are above average of what we saw the years before the pandemic.

Vols could trade higher if spot can break the 10.00 support and build some momentum to the downside. We see good value to buy downside options with vols at relative low levels and risk reversal favor topside which discounts the puts even further. We prefer low delta puts and like to buy a bit further out on the curve.

Buy 3 months 9.7000 EURSEK put
Cost 170 pips

Alternative

Buy 6 month 9.5000 EURSEK put
Cost 220 pips

Spot ref.: 9.9900

• 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.

Learn more about FX Options:

Forex Options – An introduction

Forex Options – Exotic options