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CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money.
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technical analysis

FXO Market Update - Feb 23

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  FX volatility continue to trade bid as the volatility in US yields have picked up. FX still mainly rangebound and EURUSD trades in the middle of the range. 1 week EURUSD volatility is up over 1 vol from the lows last week and we see this as a good opportunity to sell some short dated options to collect decay.

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.

23_MAAL_1
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.
23_MAAL_2
Source: Bloomberg, EURUSD spot

USD volatility continues to trade bid with the high volatility in US yields. Realized vol has picked up a bit over the last week but implied vol has increased even more making all G10 vol excepts NOK vol trade with a risk premium, see top left graph below.

EURUSD still stuck in the range and closing in on the 1.2180-90 pivotal area. Vol has traded higher with 1 month up 0.5 vol and 1 week up just over 1 vol from the lows last week. The market is not favoring any side at the moment and risk reversal trades close to flat for the whole curve.

We are neutral in our view on EURUSD spot short term and but like to take advantage of the bid on vol and sell short dated strangles to collect some decay.

Sell 1 week 1.2100 EURUSD put
Sell 1week 1.2200 EURUSD call
Receive 36 pips

Alternative

Sell O/N 1.2120 EURUSD put
Sell O/N 1.2170 EURUSD call
Receive 16 pips

Spot ref. 1.2145

23_MAAL_3
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

Forex Options – Exotic options

Forex Options - Webinars

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