FXO Market Update - Vols remain bid after last week's CB meetings
OTC Derivatives Trading
Summary: Last week was volatile with several central bank meetings, where SNB delivered the biggest surprise with a 50bps hike. EURCHF dropped 2% on the announcement and vols spiked higher, 1 month trades 0.5 vol higher now than before SNB. GBPUSD vols also higher now compared to a week ago after a volatile week.
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.
Last week gave us a volatile week with several central bank meetings. SNB delivered the biggest surprise by hiking with 50 bps. FED delivered in line with expectations, BoE delivered a hawkish hike and BoJ was the outliner coming in on the dovish side.
Vols were bid going in to last week but it proved to be priced correct with most currencies delivered inline or excided expected spot moves. SNB delivered the biggest surprise and CHF vols trades higher now than before the meeting. EURCHF 1 month traded 8.0 vol before SNB and trades 8.50 now after spot sharply dropped 2% on the surprise hike. EURUSD 1 month is down around 0.5 vol from beginning of last week and USDJPY is down 1.5 vol, both pricing out the event risk. GBPUSD 1 month is 0.25 higher after a choppy week, despite both the FED and BoE events are prices out.
There are no big events in the coming weeks, US CPI first in 3 weeks. Bot EURCHF and GBPUSD vols are on the high side after last weeks move in spot and we think we will see vols gradually come lower over the next days. We see limited topside in EURCHF spot after the hawkish SNB and we like to sell EURCHF calls. Direction in GBPUSD is more difficult short term so we prefer to sell strangles.
Sell 1 week 1.0250 EURCHF call
Receive 20 pips
Sell 1 month 1.0400 EURCHF call
Receive 20 pips
Sell 1 month 1.2000 GBPUSD put
Sell 1 month 1.2400 GBPUSD call
Receive 175 pips
Spot ref.: 1.0175 and 1.2245
- 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
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.