FXO Market Update - Oct 27

Summary:  One week left to the US election and both polls and betting market has Biden as the next president. We will look how to hedge against a Trump victory through EURUSD and USDCNH options.


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.


  • Tensions building up between Turkey and France. USDTRY spot trades higher and has broken up above the psychological 8.00 level, Vols are paid up with 1 month at 21.0, up from 18.0 at Friday close.

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. Blue: USDCNH spot. Black: USDCNH 1 month Risk Reversal

One week left to the US election and Biden is still well ahead in the polls. The polls shows a Biden victory as very likely, while the betting market got a Biden victory priced a bit lower and have a full Biden sweep at around 50% probability.

Event risk for the election has changed small since our last market update related to the election done on 8 October. EURUSD O/N forward vol for the election is currently 22 vol compared to 23 vol on 8 October. USDJPY currently trades at 24 vol compared to 27 on 8 October while USDCNH is priced a bit higher, 23 vol vs 20 vol on 8 October.

With both polls and the betting market having Biden as a clear winner the surprise, and at least short-term big moves, will be if Trump win the election. A Trump victory will be dollar positive and we will see largest moves against EM, like CNH and MXN.

It is unsure if we can get a clear result already on the election night with the large amount of mail votes this year due to the Covid virus. Therefore, any long options strategies are recommended to be 2 weeks or longer to cover any delay in the result of the election.

USDCNH has traded lower over the last months and we have seen USDCNH risk reversals trade higher despite spot grinding lower. We have had another spike higher in the risk reversals over the last days as spot has corrected higher, see graph above. At-the-money vols have also been market higher with 1 month up 0.5 vol today and almost 1.0 vol over the last week.

EURUSD 1 month is up 0.2 vol today and same seen over the last week. The risk reversal been trading relative stable over the last month with 1 month RR currently trades at 0.3 for calls which is close to the mean seen over the last month.

When hedging against a Trump victory and buying USD calls, EURUSD puts offer good value due to the discount you get from the risk reversal which trades favor EURUSD calls. USDCNH calls on the other hand is very expensive due to both the high at the money vol and the elevated risk reversal. From a vol perspective hedging against a Trump victory in USDCNH by buying spot and hedge the spot with a USDCNH put or buying a call spread offer best value.

Buy 2 week 1.1700 EURUSD put
Cost 44 pips

Spot ref.: 1.1815

Buy USDCNH spot
Buy 2 week 6.6500 USDCNH put
Cost 242 pips

Alternative

Buy 2 week 6.7200 USDCNH call
Sell 2 week 6.8000 USDCNH call
Cost 280 pips
(the 2 week 6.7200 cost 482 on its own)

Spot ref.: 6.7010

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.

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 – An introduction

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