FXO Market Update - Sep 23

FED surprised a bit on the hawkish side yesterday, raising the dot plot and slightly pulled forward the time frame for the first rate hike. We see the dollar to continue to trade supported and rates to climb higher. This could put some pressure on gold, which could do another test of the 1700 level.

XAU vols have trade up small from the 1-year lows over the last week but still trades around the 10^th percentile. Risk reversals trades close to the lows with 1 months risk reversal 0.5 vol for puts and 3 months 0.2 for calls. Buying XAU puts looks like good value with vols on the lows, either buy outright puts or buy put spreads where the sold put gives good discount to the overall cost due to the low risk reversal.

Buy 1 month 1750 XAUUSD put
Cost 20.55 pips

Buy 1 month 1750 XAUUSD put
Sell 1 month 1700 XAUUSD put
Cost 13.75 pips

Alternative

Buy 3 months 1750 XAUUSD put
Cost 41.50 pips

Buy 3 months 1750 XAUUSD put
Sell 3 months 1650 XAUUSD put
Cost 30.25 pips

Spot ref. 1767.00

• 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