FX FX FX

FX Trade View: Downside via EURUSD put option

Trade View 5 minutes to read
Short Term / Sell
John Hardy

Head of FX Strategy

Summary:  EURUSD is heavy near range support and may push lower still as the Eurozone outlook sours more quickly than the outlook for the US, where the Fed continues to actively tighten. We trade the risk for lower EURUSD levels via a put option, given very low implied volatility.


Instrument: EURUSD put option, strike 1.1200, expiry May 15
Price Target: Spot price below 1.1000
Market Price: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)

Background:
EURUSD is heavy near range support, with the turnaround in the US Federal Reserve guidance since the hawkish December Federal Open Market Committee meeting unable to engineer a more profound sell-off in the US dollar as the Eurozone outlook has worsened so drastically that the European Central Bank may be forced to consider easing measures at coming meetings while the FOMC is actively tightening. EURUSD may eye new local lows for the cycle, driven chiefly by concerns for the Eurozone economic outlook and ECB being a first mover in bringing new policy accommodation.

As well, given the weakening outlook for global growth, markets may have been a bit premature in celebrating the Fed’s and other central banks’ turn away from a tightening bias as historically, an easing cycle from central banks only arrives at this point in the cycle due to mounting worries of recession and with a backdrop of very weak asset markets. A fresh sell-off in global equity markets could support the US dollar, typically a safe haven from a liquidity angle during times of crisis. A wildcard risk for the euro side of the EURUSD equation is the risk of fresh existential worries driven by populist demands for expanding fiscal stimulus and concerns on sovereign debt funding at the periphery.
 
Parameters:

Entry: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)
Stop: n/a
Target: Price target: Spot price below 1.1000
Time Horizon: Short-term

  
Chart: EURUSD

The market looks heavy near the ultimate range low posted late last year at 1.1216. Downside optionality looks “cheap” for two reasons. First, it is rather cheap as implied volatilities are quite low relative to the historically range due to the lack of recent volatility in EURUSD and lack of anticipation that anything dramatic is set to happen. EURUSD implied volatility is currently below 6.5% for 3-month options. Second, we have to remember the interest rate carry is rather high for EURUSD and means that the forward price (on Feb 13 with a spot price of 1.1320) is 1.1405 for the May 15 expiry date. 
 
Source: Saxo Bank
Longer-term chart:

On a longer-term chart, traders may note the lack of notable support levels should the support levels below 1.1200 – perhaps the round, psychological levels starting with 1.1000 the most important if the pair finds itself on the way down.
 
Source: Saxo Bank
Management And Risk Description:
Technically, the EURUSD softness points to the range lows as a possible trigger for a more profound move lower in coming months. We take a three month put option position, in the hopes of the price action moving well below 1.1000 over the three month time frame. 

Consider longer dated options and different strike prices for a different risk/reward profile.

Risks: risk to this trade is 100% loss of the amount paid up front for the option premium.



A compiled overview of Trade Views provided on Home.saxo can be found here (https://www.home.saxo/en-au/insights/news-and-research/trade-views/report).

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed you initial investment.

Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.