FXO Market Update - Vols remain bid after last week's CB meetings

FXO Market Update - Vols remain bid after last week's CB meetings

Mathias Alrixon

OTC Derivatives Trading

Summary:  Last week was volatile with several central bank meetings, where SNB delivered the biggest surprise with a 50bps hike. EURCHF dropped 2% on the announcement and vols spiked higher, 1 month trades 0.5 vol higher now than before SNB. GBPUSD vols also higher now compared to a week ago after a volatile week.


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.

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.
Source: Bloomberg, Blue: EURCHF spot, Black: EURCHF 1 month vol

Last week gave us a volatile week with several central bank meetings. SNB delivered the biggest surprise by hiking with 50 bps. FED delivered in line with expectations, BoE delivered a hawkish hike and BoJ was the outliner coming in on the dovish side.

Vols were bid going in to last week but it proved to be priced correct with most currencies delivered inline or excided expected spot moves. SNB delivered the biggest surprise and CHF vols trades higher now than before the meeting. EURCHF 1 month traded 8.0 vol before SNB and trades 8.50 now after spot sharply dropped 2% on the surprise hike. EURUSD 1 month is down around 0.5 vol from beginning of last week and USDJPY is down 1.5 vol, both pricing out the event risk. GBPUSD 1 month is 0.25 higher after a choppy week, despite both the FED and BoE events are prices out.

There are no big events in the coming weeks, US CPI first in 3 weeks. Bot EURCHF and GBPUSD vols are on the high side after last weeks move in spot and we think we will see vols gradually come lower over the next days. We see limited topside in EURCHF spot after the hawkish SNB and we like to sell EURCHF calls. Direction in GBPUSD is more difficult short term so we prefer to sell strangles.

Sell 1 week 1.0250 EURCHF call
Receive 20 pips

Sell 1 month 1.0400 EURCHF call
Receive 20 pips

Sell 1 month 1.2000 GBPUSD put
Sell 1 month 1.2400 GBPUSD call
Receive 175 pips

Spot ref.: 1.0175 and 1.2245

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:

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