FXO Market Update - Feb 17

A little bit of risk on over the last days with vols coming in from the highs at the start of the week. JPY vols and skew has come lower with EURJPY 1 month down around 1 vol from Monday and 1 month risk reversal trades at 1.6 compared to 2.0 on Monday.

Market still very sensitive to any headlines and we wont see the big sell off before US or NATO confirms Russia has started to move back troops to their bases. Vol trades higher today after headlines overnight that the Russian backed separatists in eastern Ukraine and Ukraine forces violated the cease-fire rules.

EURUSD 1month vol up 0.25 form yesterday and 1 month is almost up the highs from earlier in the week while JPY vols have not done the same catch up. Spot is not moving much and it is all priced as risk premium. 2 week EURUSD risk premium is just above 2 vol which is the highest level in over a year. Just note 1 month risk premium in the graph below doesn’t show the same picture as the realized vol for 1 month include the big move from 1.1150 to 1.1450, which was rate related.

We like to sell in to the higher EURUSD vol and think strangle offer good value as the butterfly also trades higher.

Sell 1 month 1.1500 EURUSD call
Sell 1 month 1.1200 EURUSD put
Receive 70 pips

• 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

Forex Options – Exotic options