technical analysis

FXO Market Update - Sep 28

Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  GBPUSD trades down over 1% as dollar trades bid with yields surging while GBP trades weaker after new concerns about supply shortage. Spot has taken out the strong support at 1.3610 and 1.3570 which opens for a move lower. We prefer to buy cheap downside strategies like ratio put spreads after the big move in spot today. Ratio put spreads take advantage of both the spike in vol and risk reversal.


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.

28_MAAL_1
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.
28_MAAL_2
Source: Bloomberg, Blue: GBPUSD spot

US yields keeps surging which keeps dollar bid. GBP trades lower on back of the supply shortages which had GBPUSD trade down over 1% today.

Spot has taken out the July and August lows at 1.3610 and 1.3570 which opens up for a move lower. Vol trades bid with 1 month up 0.7 vol to 6.9. Risk reversals trades better bid for downside with 1 month risk reversal currently trading at 0.65 for GBP puts, up from 0.25 for puts yesterday.

We prefer to buy some cheap downside strategies in GBPUSD after the big move in spot. Ratio putspreads where you net sell vol take advantage of the spike in both ATM vol and risk reversals.

Buy 1 month 1.3500 GBPUSD put in 1 mio
Sell 1 month 1.3300 GBPUSD put in 1.5 mio
Cost 48 pips
(The 1.3500 put on its own cost 94 pips)

You can further reduce the cost by selling a 1 month 1.3675 call, this would make the strategy close to zero cost.

Spot ref. 1.3535
28_MAAL_3
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.

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