Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
OTC Derivatives Trading
Summary: ZAR has outperformed since the start of the year with USDZAR spot down 10%. Spot has consolidated over the last weeks and there is good support just below current spot level. 1 month vol has traded small higher over the last week while realized has dropped significantly, making the risk premium trade at 2.5 vol. We like to sell USDZAR puts over the long weekend.
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.
ZAR has traded stronger since beginning of the year with USDZAR down from 16.00 in January to current levels at 14.55. Spot has consolidated between 14.40 and 14.80 over the last weeks and there is good support in the 14.35-14.50 area which is the lows from October and recent lows from April.
Realized volatility has dropped significantly over the last weeks as spot been range trading but 1 month implied vol has traded small higher which makes the 1 month risk premium trade at 2.5 vol. 1 month realized is 11.90, down from 14.10 at 1 April, at the same time 1 month implied is up from 14.00 to 14.40. 1 week implied trades around 12.00 due to the long holiday weekend but we still think it offer good value to sell as it doesn’t have many full trading days in it. Alternative sell a bit longer to get higher vol and a lower strike.
Sell 1 week 14.4000 USDZAR put
Receive 200 pips
Alternative
Sell 1 month 14.2000 USDZAR put
Receive 650 pips
Spot ref.: 14.5650
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.
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