FXO Market Update - Oct 15
OTC Derivatives Trading
Summary: RBA Lowe's dovish speech had AUDUSD break out of the technical triangle formation, which now opens for a move lower in spot. Volatility is just marginally higher on the break and we good opportunity to pick up some AUD put options.
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.
- Brexit talks continues and GBP vols trades bid as market see more headline risk the coming days as the EU summit starts.
Better than expected Aussie job data today was ignored by the market. Instead focus was on RBA Lowe’s speech. Lowe opened up for buying bonds further out on the curve and signaled for a rate cut. The dovish comment had AUD break out of the triangle formation with 0.7000 as the next support level.
Vols trades just marginally higher after the move with 1 week up 0.5 and 1 month up 0.2 on the day. Both vol and risk reversal still trades at relative low levels and there should be ample upside in both if spot would break the 0.7000 level.
We like to buy either short dated puts for a move down to 0.7000 or buy lower delta downside options a bit further out on the curve to benefit from a pick up in vol and risk reversal if spot would break down below 0.7000.
Buy 1 week 0.7075 AUDUSD put
Cost 27 pips
Buy 3 month 0.6800 AUDUSD put
Cost 55 pips
Spot ref.: 0.7110
- 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.