FXO Market Update - Nov 12
Summary: XAGUSD vols are currently the most overpriced when comparing to realized vol. Risk reversals are on the high end, making XAGUSD calls very pricy.
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.
XAGUSD has traded in a relative narrow range between 22.50/26.00 since mid-September. We saw some high volatility just after the US election, like with most of the market, but spot is now back to the middle of the range again after testing the highs.
While most of the vols have been market lower when the US election risk premium is gone, XAG vols still trades around pre-election levels. XAGUSD 1 month currently trades around 39 vol, same level as on the 4 November. XAGUSD vol is currently the most overpriced vol when comparing to the realized vol, 1 month trades with a risk premium of 4 vol, see bottom left graph below.
1 month risk reversal traded around 4.0 for XAG calls before the election and currently trades around 5.5. We saw a spike in the risk reversal when spot traded up to 26.00 which still has not been adjusted back with spot back down to the middle of the range. 1 month risk reversal traded up to 8.0 back in August when spot was at the highs and traded around 2.0 at the start of the summer.
We prefer to keep a short vol position considering the expensive vol, high risk premium. Selling XAG calls offer best value considering the pricy risk reversal.
Sell 1 month 26.00 XAGUSD call
Receive 5000 pips
Sell 1 month 28.00 XAGUSD call
Receive 2000 pips
Spot ref. 24.30
- 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
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.