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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.

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.
Source: Bloomberg, Blue: EURUSD spot

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

Alternative:

Buy 1 month 1.0600 EURUSD OneTouch
Cost 20%

Macron Victory:
Sell 1 month 1.0700 EURUSD put
Sell 1 month 1.1200 EURUSD call
Receive 50 pips

Spot ref.: 1.0975


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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