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FXO Market Update - Sep 14

Mathias Alrixon

OTC Derivatives Trading

Summary:  Vols have traded lower over the summer, with just a few exceptions, and most vols are trading at or close to 1-year lows. Autumn tends to be more volatile than the summer months and we see this as a good opportunity to buy some long vol for the last months of the year.

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.

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.
Source: Bloomberg, Black: High/Low range, Grey: Median, Blue: Current. (1 year history)
Source: Bloomberg, Black: High/Low range, Grey: Median, Blue: Current. (1 year history)

We have had a couple of quiet months over the summer and vols have drifted lower as spot has been range trading or trending at a slow pace.Vols have made new 1-year lows in most currency pairs over the summer and currently trading at or close to the lows, seen over the last year, with just a few exceptions.

CAD vols are trading above the 1-year median levels, this is after realized volatility has picked up over the summer as the CAD appreciation trend from the beginning of last year has come to an end. CAD has started to move lower which has resulted in a higher realized volatility and higher implied vol.

AUD and NZD vols trades a bit above the 1 year lows even if they mostly trades below the median level for the last year. This is not as much because realized vol has started to trade higher but more of a higher risk premium as the market trades more in a risk off mode over the last weeks as the market is nervous for a setback in equities. For example, AUDUSD risk premium trades above the 75th percentile for all tenors 1m to 1y.

In the EM/Metal space all vols are trading close to 1 year low as EM currencies have traded stronger over the last month as we start to see improvements in the covid trends. And as usual, a stronger EM trend has resulted in lower volatility.

We think it is time to start buy some longer dated options now when the summer lull is over. We see rates vol to pick up over the coming months and equities looks vulnerable for a correction lower. And historically autumn tends to be more volatile than the summer months. With most vols on the lows it’s just to pick what suits your view best. Either just buy vol as in straddles or strangles without any directional view in spot or longer dated directional trades.

We see most upside in EM vols but with the higher vol level than most G10 vols it can still be costly if the timing is too early. EURUSD vol also trades on the lows and are a lot cheaper to hold in the inventory but maybe don’t have the same upside as some of the EM pairs when volatility start to go higher. Other alternatives are GBPUSD or other higher beta G10 like EURNOK and USDSEK which should offer higher upside if market starts to move.
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.

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

Forex Options - Webinars


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