FXO Market Update - Mar 22 FXO Market Update - Mar 22 FXO Market Update - Mar 22

FXO Market Update - Mar 22

Summary:  Market has turned focus back to inflation and rates and USD trades higher. USDJPY has taken out the 120.00 level and is up form 115.00 in about 2 weeks. Vol trades bid despite realized not performing with 1 month USDJPY currently at 7.5 vol and realized vol at 6.0. Market positioning keeps risk reversals bid for puts even if spot is up 4% in 2 weeks.


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: USDJPY spot, Black: USDJPY 1 month vol, Red: USDJPY risk premium

Vols have traded lower in EUR and CEE3 over the last week after peaking two week ago when EURUSD 1 month traded as high as 12.60. 1 month is now back to 8.50 compared to 7.50 before Russia invaded Ukraine.

Market have started to turn focus back to inflation and rates and we have seen US rates and the USD trade higher with the last push higher yesterday after hawkish comments from Powell.

USDJPY continues to trade higher with US rates higher and spot has taken out the 120.00 level, spot now trades at the highest level since the start of 2016. Hearing from the street, the 120.00 was a rather large barrier level and now when that is taken out market is short vol to the downside, from vanilla hedges done against the barrier options. At the same time market is long vol at these spot levels and higher. So even if spot has moved up from 115 to 120 in a short time the market positioning makes the risk reversal still trade bid for the downside, 1 month 0.25 for puts, as the market needs to buy back downside strikes while they are long options at current spot levels. This also means that any vol rallies when spot trades higher most likely will be short lived as the market has long options to the topside in the inventory they like to sell. Lastly even if spot is marching higher the realized vol is still trading around 6 vol while implied currently trades at 7.5, giving a risk premium of 1.5 vol which is the highest in G10. With this in mind we prefer to run short vol strategies like covered calls or risk reversals where we buy calls and sell puts to take advantage of the risk reversal that is bid for puts.

Sell 1 week 121.50 USDJPY (covered) call
Receive 20 pips

Alternative

Buy 1 month 121.25 USDJPY call in 1 mio
Sell 1 month 118.75 USDJPY put in 2 mio
Zero cost

Spot ref.: 120.65

We like to play the covered call strategy by selling shorter dated options so we can re-sell and adjust the strike after each expiry. We prefer to do the risk reversal in one by two ratio to take advantage of both the high vol and the risk reversal
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

Forex Options - Webinars

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.