Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FXO Market Update - Nov 05
Summary: Vols are marked lower and we have seen a more aggressive sell off than expected. We see limited downside in vols from here and think it is a good opportunity to pick up some directional trades.
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.
We are still waiting for the final result for the US election with a few states left to report. It looks like Biden will win after a much closer race then the polls and betting market showed before the election.
Vols have been sold of quite aggressive, and more than what we would have expected. Both EURUSD and USDJPY 1 month vols are down more than 2 vol from Tuesday highs and now trades close to 4 months lows. USDCNH and GBPUSD 1 month vols down around 2 vol as well but still trades above the lows seen over the last months. We still got the Brexit trade talks risks in GBP and CNH vols are higher now compared to a few months back after China removed the CCF and we can expect higher vols in CNH going forward.
Price action yesterday was similar to last election with spot moving less than expected when looking at open/close rates but with quite big swings during the day as results showed a much closer race than the market had expected. All currency pairs were way overpriced when looking at the open/close range but if you traded the gamma during the day there were good opportunities to make back the premium.
Skews have normalized as most risk has been priced out by now. Risk reversals move closer to par for most currency pairs and 10 delta butterflies are marked lower. 1 month risk reversal in USDJPY is down from 1.60 to 1.00 for puts and USDCNH risk reversal is down from 1.70 to 1.20 for calls.
We do not see much immediate downside in vols for now and see this as a good opportunity to buy some directional trades.
- 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 - WebinarsLatest Market Insights
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