FXO Market Update - Apr 05
Summary: Market has shifted focus to the French election which has got some attention after Le Pen closing in on Macron in the last polls. The risk premium for the second round has moved higher and is currently priced at double a normal day, expected move around 1.2% in EURUSD. We have seen good demand to buy EUR puts over the last sessions with EURUSD 1 month risk reversal up from 0.9 to 1.5 for puts since Friday and ATM vol is up 0.5 to 8.4.
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.
Market has shifted focus to the French election where the first round take place this weekend and the second round on 24th April. Market has treated it as a nonevent but the latest polls shows that Macron lead over Le Pen has narrowed from 13% to 7% for the first round while the polls shows 55/45% with Macron over in a potential second round race against Le Pen. Risk premium for the second round is priced with double weight compared to a normal day and expected move is around 1.2% in EURUSD. A Macron victory would most likely result in limited move in spot with EURUSD moving a bit higher while EURUSD could drop 2-3% if Le Pen wins.
As a result we have seen good demand to buy EURUSD puts over the last days with 1 month EURUSD trading 8.4, up 0.5 from Friday, and 1 month risk reversal has moved from 0.9 to 1.5 for EUR puts over the last days.
If you want to hedge/bet for a Le Pen victory then EURUSD put spreads have good value with the higher risk reversal or buy a OneTouch for the downside. For a Macron victory we like to sell strangles.
Le Pen victory:
Buy 1 month 1.0900 EURUSD put
Sell 1 month 1.0600 EURUSD put
Cost 56 pips
Buy 1 month 1.0600 EURUSD OneTouch
Sell 1 month 1.0700 EURUSD put
Sell 1 month 1.1200 EURUSD call
Receive 50 pips
Spot ref.: 1.0975
- 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 - Webinars
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.