FXO Market Update - USD long squeeze

Risk sentiment stronger across the board with Shanghai lockdown easing and the last days negative price action tops out. Equities are higher and the dollar trades lower. EURUSD trades back up above 1.0500 as ECB hints that hikes bigger than 0.25 is possible. The break down below 1.0500 last week was the event that spurred the last spike in vol. Vols trades offered now when spot is up 200 pips from the low and back up above 1.0500. EURUSD 1 month vol is down 1.2 vol from the opening this week and trades at 9.0. 1 week is down around 2 vols at the same time and trades at 8.25.

Market remains heavy long in USD and there is potential for a position squeeze in dollar if we can hold on to the last days momentum. A squeeze out of the long USD positions could take EURUSD up to 1.0750 quickly.

We like to buy some short dated EURUSD calls and not spend too much premium as spot could also just get stuck between 1.05-1.06 if we don’t get enough momentum.

Buy 1 week 1.0600 EURUSD call
Cost 26 pips

Spot ref.: 1.0535

• 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