FXO Market Update - Sep 21
OTC Derivatives Trading
Summary: Equities continues to trade heavy and market trades in risk off mode. Front-end vols are trading higher but so far spot is just grinding in risk off mode and realized vol has not traded much higher. This has made the risk premium to trade a lot higher and AUDUSD 1 month risk premium trades close to 2 vol.
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.
Equities continues to trade heavy and market trades in risk off mode with USD trading stronger and vol trades bid.
So far market trades cautious and FX is mainly grinding towards risk off with selling of AUD, NZD and EM and buying of USD, JPY and CHF. Front-end vols are trading higher even if realized vol hasn’t traded much higher as spot is in grinding mode. Back-end vols is just a touch higher so there is still time to buy some longer dated options like we wrote about last week. But with front-end vols higher there are good opportunities to sell some short dated options for all the short sellers. As an example 1 month AUDUSD is up 1 vol since Friday and 1 year is only up 0.25 vol. This has pushed the risk premium higher and 1 month AUDUSD risk premium currently trades 1.8 vol (see top left graph below).
We prefer to sell shorter dated options, 1 week or shorter, to take advantage of the high vol in the very front end of the curve.
Sell 1 week 0.7150 AUDUSD put
Receive 12 pips
Sell 1 week 0.7300 AUDUSD call
Receive 9 pips
Spot ref. 0.7230
- 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.