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technical analysis

FXO Market Update - Nov 4

Forex Options
Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  Polish central bank hiked with 75bps yesterday which was more than expected but not a huge surprise after the surge in inflation data. Spot trades at the high end of this year's range and we like to go short EURPLN at these levels for a move lower, either sell EURPLN calls or sell the risk reversal.

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.

04_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.
04_MAAL_2
Source: Bloomberg, Blue: EURPLN spot

Polish central bank hiked with 75bps yesterday, which was more than the expectations of a 25-50bps hike. The 75bps hike was not a huge surprise after the resent surge in inflation data. EURPLN spot dropped 200 pips on the announcement, but spot has closed the move today and we are back to levels seen before the announcement yesterday.

Spot trades at the high end of this year’s range and we don’t see spot making any new highs with the hawkish central bank as long as global risk sentiment remains positive.

Vols are relative unchanged with only the very front end of the curve market lower now when the event risk is priced out. 1 month trades 5.85 compared to 6.0 yesterday.

We like to sell some EURPLN calls or sell the risk reversal, sell call and buy put, for a move lower in spot.

Sell 1 month 4.6500 EURPLN call
Receive 145 pips

Buy 1 month 4.5500 EURPLN put
Cost 125 pips

Spot ref.: 4.6000
04_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

Forex Options - Webinars

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