FXO Market Update - Nov 05

Summary:  Vols are marked lower and we have seen a more aggressive sell off than expected. We see limited downside in vols from here and think it is a good opportunity to pick up some directional trades.


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.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, 1 month vol Blue: EURUSD, Black: USDJPY, Green: GBPUSD, Red: USDCNH

We are still waiting for the final result for the US election with a few states left to report. It looks like Biden will win after a much closer race then the polls and betting market showed before the election.

Vols have been sold of quite aggressive, and more than what we would have expected. Both EURUSD and USDJPY 1 month vols are down more than 2 vol from Tuesday highs and now trades close to 4 months lows. USDCNH and GBPUSD 1 month vols down around 2 vol as well but still trades above the lows seen over the last months. We still got the Brexit trade talks risks in GBP and CNH vols are higher now compared to a few months back after China removed the CCF and we can expect higher vols in CNH going forward.

Source: Saxo Bank. O/N Vol: O/N vol for 3 Nov. Implied 1 day move: cost of O/N straddle (% and pips). Hi/Lo: High/Low range. Open/Close: Open close range

Price action yesterday was similar to last election with spot moving less than expected when looking at open/close rates but with quite big swings during the day as results showed a much closer race than the market had expected. All currency pairs were way overpriced when looking at the open/close range but if you traded the gamma during the day there were good opportunities to make back the premium.

Skews have normalized as most risk has been priced out by now. Risk reversals move closer to par for most currency pairs and 10 delta butterflies are marked lower. 1 month risk reversal in USDJPY is down from 1.60 to 1.00 for puts and USDCNH risk reversal is down from 1.70 to 1.20 for calls.

We do not see much immediate downside in vols for now and see this as a good opportunity to buy some directional trades. 

Source: Saxo Bank
  • 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.

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