FXO Market Update - Mar 10
OTC Derivatives Trading
Summary: Risk on move over the last days with a big bounce in equities yesterday. Spot has moved in risk on direction with both EURUSD and EURCHF up 200 pips from the lows. Vols have corrected lower and skew is coming back in, EURUSD 1 month down 2 vol over the last days and EURUSD risk reversal now trades 1.8 compared to 3.65 on Monday. We also see spreads start to tighten up as spot moves away from the extremes and vol trades lower. ECB today and FED next week keeps 1 week supported.
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.
Market started the week in risk off with EUR hitting new lows on Monday and EURUSD 1 months trading up to 12.60. We have since then seen a rebound in risk with equities higher and safe heaven currencies marked lower. EURUSD spot has rebounded from the lows just above 1.0800 to now trade 1.1050. CHF and Gold has sold off with EURCHF trading below par on Monday to now trade at 1.0250 while XAUUSD topped out above 2060 to now trade below 2000 again.
Vols have adjusted lower with spot trading away from the extremes, EURUSD 1 month down 2 vol from the highs, currently trades 10.40. XAUUSD 1 month was trading around 29 vol on the highs to now trade 23.50 while EURCHF 1 month is down 1 vol to now trade 9.25. Risk reversals following vols lower with 1 month EURUSD risk reversals trading 1.8 for downside while it was 3.65 on Monday.
We have ECB today and FED next Wednesday so the front end still trades supported, EURUSD 1w at 14.0. Market is also reluctant to be short options over the weekends and Mondays are still in good demand.
CEE3 vols have also been marked lower for the first time in two weeks as spot trades away from the extremes. Both 1 month EURPLN and EURHUF down 1.5-2.0 from the highs.
Risk premiums have come lower as implied vols trades lower while realized holing up, we have seen big spot moves in risk on direction. EURUSD now trades close to fair value, implied and realized vol the same, while Scandies still looks cheap. USDJPY spot has not moved much over the last weeks and spot still in the last 6 months range. USDJPY risk premium trades at 1.25 vol.
The good thing is we see tighter spreads in the market as spot has calmed down and vols trades lower. Spreads for 1 month and longer contracts has tighten considerably over the last days while the very front hasn’t come in as much.
- 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
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.