FXO Market Update - Mar 11

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

• 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