FXO Market Update - Sep 28

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.

• 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