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.

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: XAGUSD spot, Black: XAGUSD 1 month vol

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

Alternative

Sell 1 month 28.00 XAGUSD call
Receive 2000 pips

Spot ref. 24.30


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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