technical analysis

FXO Market Update - Mar 11

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  Market trades in risk-on mode after US CPI came in lower than expected yesterday. EM trades stronger but high betas like USDMXN and USDTRY got some more catch up to do if the positive risk sentiment would continue. Both currency pairs offer some good trade opportunities in the current vol market.


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.

11_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.
11_MAAL_2
Source: Bloomberg, Black: USDMXN spot, Blue: USDTRY spot

US CPI came in just below expectations yesterday which had yields trade lower and equities higher. Market continues to trade in risk-on mode today with 10y US yields down over 10bp from the highs at the start of the week and the dollar down 1% against the index.

EM has traded stronger but high betas like TRY and MXN, which has suffered the most over the last month, have more room to trade stronger if the positive risk sentiment will continue.

USDMXN is one of the most expensive currency pairs with a risk premium of 1.6. The risk reversal trades relatively low compared to ATM vol which makes put expensive compared to ATM. Ratio put spreads take advantage of both the expensive vol and relative high puts value. 1 by 2 put spreads can be cheap structures but with the disadvantage that the structure starts to lose money if spot moves to far in your direction.

USDTRY vol trades closer to fair value with a risk premium of only 0.4. Risk reversal is on the low side but the carry trades on the high side and has not adjusted lower over the last days. Buying USDTRY puts looks like better value than for example put spreads with the fair value vol and high carry.

Buy 1 month 20.6000 USDMXN put in 1 mio
Sell 1 month 20.2000 USMXN put in 2 mio
Cost 400 pips

Buy 1 month 7.3500 USDTRY put
Cost 770 pips

Spot ref. 20.8000 and 7.4600

11_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.

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