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technical analysis

FXO Market Update - USDMXN back to the middle of the range.

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  USDMXN spot is back below 20.00 and in the middle of last months’ range. Vols have traded lower over the last week as spot has moved away from the highs but there is still room for vols to trade lower with spot at current levels.

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.

28_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.
28_MAAL_2
Source: Bloomberg, Blue: USDMXN spot

USDMXN is back below 20.00 and to the middle of the last 3 months range of 19.50/20.65. Vols have traded lower as spot has moved away from the highs at 20.65 but still trades higher than when spot been around these levels earlier during the last months. 1 month currently trades at 11.50 but there is room to move down another 1-1.5 vol if spot stick around these levels for a while. The next big event is US CPI in two weeks so there is good chance vols will continue drift lower and spot stay around these levels.

Risk reversals still on the high side and have not come down as much compared to the ATM vol when spot moved lower. USDMXN top side offers best value with the high risk reversal but we prefer selling strangle for the extra premium. 

Sell 1 month 20.5000 USDMXN call
Receive 1,000 pips

Sell 1 month 19.5000 USDMXN put
Receive 420 pips

Spot ref.: 19.9250

28_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

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