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CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money.
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technical analysis

FXO Market Update - Sep 15

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  USDCNH breaks lower and vol trades higher as market is caught short gamma.

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.

  • GBP vols taking a breather as spot started the week trading higher from the lows, market is still not ready to sell-off vols yet.
15_MAAL_1
FX volatility, source Bloomberg. 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.
15_MAAL_2
Source: Bloomberg
 

USDCNH has taken out the 6.82 support after better than expected Industrial production and retail sales. Spot traded sharply down from 6.81 to 6.78 today which has opened up for a move down to 6.70-6.78 area.

Vols spiked higher on the move in spot as market is caught short gamma below 6.80. 1 month up to 5.10 from 4.50 yesterday. Risk reversal has not moved and trades unchanged at 0.65 for USD calls.

6.8200 should now offer good resistance to the topside and selling UDSCNH calls offer good value with vols higher and risk reversal sill bid for topside.

  • Sell 1 months 6.8500 USDCNH call
    Receive 190 pips

Alternative

  • Sell 1 week 6.8000 USDCNH call
    Receive 100 pips

Spot ref.   6.7800



15_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.

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

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