Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: CAD vols are the only vols trading over it's 1-year median level. Risk reversals trades at 5 year highs, except for the period between March-April last year. Next big data points are CPI and BoC, both in over a month from now. We like to sell 1 month options in USDCAD, either USDCAD calls to take advantage of the high vol and risk reversal or strangles if you think USDCAD will range trade for the next month.
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.
As we wrote about in the last piece, vols are trading at 1-year lows in most currency pairs while CAD vols are the only currency that trades above the 1-year median level. Realized CAD vol has picked up after CAD has started to trade lower which has pushed implied vol higher as well.
CAD CPI was out yesterday, and next big data points are CPI on 20th Oct and BoC 27th Oct. USDCAD looks to have started to flatten out the trend higher and been trading in a wide 1.2450/1.2850 range for the last two months. Risk reversal trades at the highest level in 5 years, except for during the Covid crisis in March-April last year. This makes USDCAD call vols very high compared to history, with both ATM vol and risk reversal at high levels.
We like to sell 1 month options, which expires before both CPI and BoC. Either sell USDCAD calls to take advantage of the high vol and risk reversal, naked or as covered calls depending on your view or sell strangle if you think the 1.2450/1.2850 range will hold for the next month.
Sell 1 month 1.2850 USDCAD call
Receive 37 pips
Sell 1 month 1.2450 USDCAD put
Receive 24 pips
Spot ref. 1.2640
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.
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