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OTC Derivatives Trading
Summary: We have seen USDCNH trade higher this week with spot sharply higher after taken out the 6.4000 resistance. Vols and risk reversals have moved a lot higher with 1 month vol up from 3.50 on Monday to trade 5.50 now, 1 month risk reversal is up from 0.75 to 1.45. We think the spot move will slow down and turn in to a grind higher and prefer to buy call spread instead of buying outright calls considering the spike in vol and risk reversal.
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.
US rates continue to trade higher while China starts to slow down with consensus GDP figures revised lower. We have seen USDCNH trade higher this week, spot started the week at 6.3800 and the break of the 6.4000 resistance had spot accelerate higher with spot trading up to 6.4750 highs today. The next resistance comes in at 6.5000 followed by 6.5800.
The sharp move higher in spot have had vols trade a lot higher. 1 month started the week at 3.50 and now trades 5.50, 1 year is up from 5.00 to 5.50. Risk reversals trades higher as well with 1 month up from 0.75 to 1.45 and 1 year up from 1.25 to 1.55. The whole curve, both ATM vol and risk reversals trades at 1 year highs but around mean levels if we look over at 5 year horizon.
There is more upside in vols short term even after the sharp move higher this week, but we think the move in spot will slow down and turn in to a slow grind higher. With this in mind we think call spreads offer better value than buying outright calls. We think ratio call spreads are good alternative if you go out a bit on the curve as we think the move will eventually will turn in to a grind higher. For shorter dated we prefer to do 1 by 1 call spreads.
Buy 1 month 6.4800 USDCNH call
Sell 1 month 6.5500 USDCNH call
Cost 250 pips
Buy 3 month 6.5000 USDCNH call in
Buy 3 month 6.7000 USDCNH call in
Cost 515 pips
1 buy 2 call spread would cost 295 pips
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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