FXO Market Update - Mar 08
OTC Derivatives Trading
Summary: Vol continue to trade higher with EUR and CEE3 vol in high demand. EURUSD 1 month traded up to 12.6 yesterday with spot on the lows. Both EURHUF and EURPLN vols trades around 19.0 vol as spot printing new highs every day in a very illiquid market. Vol trades with a high risk premium with only Scandie crosses trading at fair value.
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.
We continue to see vols trade higher with EUR and CEE3 vols in great demand. Vol of vol is extremely high for G10, both for ATM vol and the skew. Any new lows in EUR or negative headlines makes vol and risk reversals spike higher. EURUSD vols makes new highs for every new low print in spot. We see the same aggressive move lower in vol as soon as spot moves away from the lows. EURUSD 1 month is generally marked 1 vol lower if spot moves 100 pips up from the lows. EURUSD 1 month traded up to 12.6 yesterday with spot on the lows, up almost 2 vol from Friday close. Today 1 month has traded back to 12.0 as spot has moved higher. Vols are closing in on the highs from March 2020 and the peak of the Covid crisis when EURUSD 1 month traded up to 15.50 high.
So far we haven’t seen any attempt to sell CEE3 vols which are trading higher for every day as spot under pressure. Both EURPLN and EURHUF 1 month trades around 19.0 vol, compared to 6.0 and 8.0 at the start of Feb.
Also important to note is that we don’t see the typical risk off moves that we normally see. AUD usually get sold off in a risk off scenario and trades with a high correlation to the stock market. This is not the case now with AUDUSD trading higher over the last month, supported by higher commodities. AUD vols still trading higher as market in risk off but spot is not close to realize the same as the high implied vol and AUDUSD risk premium is 1.5 vol.
XAU spot is trading higher as you could expect in a market like this and vols are trading higher. 1 month XAUUSD trades at 27.50 compared to 13.0 at start of February. XAG spot is trading higher as well but not as aggressive as XAU and still trades within last year’s range, XAG 1 month trades at 40.0 compared to 26.0 a month ago. Both XAU and XAG vol trades with a risk premium of just above 10 vol.
Even if the RUB market is close to non-existing it is still trading some option contracts from time to time in the interbank market. Last we seen was USDRUB 1 month at 105/145 yesterday.
- 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
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.