Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: USDNOK spot is up 4.5% this week and NOK volatility trades bid, 1 month USDNOK volatility is up 3%.
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.
The risk-off mode and USD buying has continued through the week and the USD index is up 1.5% so far this week. EM and high beta G10 have suffered the most on back of this move. Long NOK has been one of the favorite risk-on trades over the last months and we have seen a lot of unwinds of the long NOK positions over the last days, this has made NOK the worst performer in G10. USDNOK is up 4.5% this week, in line with the move we seen in USDZAR and just shy of the worst performer USDMXN, which is up 6%.
Vols have been marked higher all week with 1 month USDNOK up from 11.25 to 14.25 and 1 month risk reversal is up from 1.25 to 3.00.
Below are a couple of strategies to take advantage of the higher volatility:
Buy 1 month 9.70 USDNOK call in 1 mio
Sell 1 month 10.00 USDNOK call in 1.5 mio
Cost 420 pips
Ratio call spreads take advantage of both the higher vol and risk reversal. The 9.70 option trades at 15.0 vol and the 10.00 trades at 16.70 vol (mid rates), i.e. you get paid 1.70 vol buying the call spread. You will be net short 0.5 mio above 10.00 which gives a break-even at 10.5580.
Alternative sell short dated covered call against long spot or sell short dated put as spot entry trades.
Sell 1 week 9.7000 USDNOK call
Receive 380 pips
Keep a long spot position and use the sold call as a take profit level.
Sell 1 week 9.5000 USDNOK put
Receive 425 pips
If you like to buy USDNOK on dips sell USDNOK puts and receive a premium. You will buy USDNOK at the strike level at the expiry if spot trades below the strike.
Spot ref. for the above examples: 9.5800
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.
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