Macro: Sandcastle economics
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OTC Derivatives Trading
Summary: A busy week ahead with ECB today, US CPI tomorrow and FED on Wednesday next week. EURUSD O/N trades around 20 vol, which is approximately 90 pips breakeven, while 1 week trades around 11.25 vol or 140 pips. This is the highest O/N vol seen over the last 10 meetings but then it also include the US CPI tomorrow. We prefer to be long 1 week over O/N to also get FED next week.
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.
Busy week ahead, we kicking off with ECB today and follow up with US CPI tomorrow and round off with FED in a week. EURUSD spot has been stuck around 1.0700 for the last couple of weeks and we could probably see spot break out and start move again with all the events lined up for the next week. ECB is first out, market expect rates to be left unchanged with the first hike in July. The market is pricing around 120bps hikes in the 4 meetings from July to end of year so the focus for this meeting will be if a 50bps hike is in the cards for the next meeting.
EURUSD O/N trades around 20 vol, approximately 90 pips breakeven, which is at the high end of the past 10 meetings. But then it also include the US CPI tomorrow which also has a high event risk priced in. 1 week EURUSD trades around 11.25 vol, approximately 140 pips breakeven, which include all three events.
We think we could expect a choppy market over the next week and EURUSD could take off in either direction if all events align. We prefer to buy 1 week over O/N and either buy a straddle and trade spot around the strike or buy a directional option on either side.
Buy 1 week 1.0715 EURUSD call
Buy 1 week 1.0715 EURUSD put
Cost 136 pips
Buy 1 week 1.0815 EURUSD call
Cost 32 pips
Buy 1 week 1.0615 EURUSD put
Cost 31 pips
Spot ref.: 1.0715
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.
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