By Saxo Bank "FXO Market Update - USD spot and vol higher"

Market Pulse – Weekly Market Insights Newsletter (16/05/2022) | crypto.com

Summary:  USD continue to trade higher and making new highs against many currencies, EURUSD at 2017 lows and USDJPY at highest level since 2002. We have not seen the same extreme moves in USD/EM, USDMXN still trades at well know levels in the middle of the last 6 months range. Vols trades higher in all USD crosses with 1 month USDMXN up 1.25 vol over the last week despite relative muted move in spot. We see this as a good opportunity to sell some USDMXN vol.


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: USDMXN spot

USD continues to trade bid with the ICE USD index taken out the pandemic highs and now trades shy of the 2017 highs. If this level is taken out we will have the strongest USD since 2002. Consequently many of the USD crosses are trading at multi year highs with EURUSD at 2017 lows and USDJPY at highest level since 2002.

USD vols trades very bid after the sharp move higher in USD over the last week. 1 month EURUSD is up from 8.2 to 9.4 over the week and USDJPY 1 month is up from 10.50 to 12.25.

While we see USD making new highs against many of the G10 currencies we don’t see the same when looking at USD/EM. USDMXN is up from 20.00 to 20.35 over the last week, which is less than 2% while EURUSD is down 3%. USDMXN spot still trades at well known levels in the middle of last 6 months range. USDMXN vols trades higher with the rest of the market with 1 month up 1.25 vol over the last week to now trade 12.25.

We like to sell in to the higher vol in USDMXN with USDMXN spot move relative muted and with spot in the middle of the range. We prefer to sell USDMXN put as we think USD will continue to trade bid.

Sell 1 week 20.2000 USDMXN put
Receive 500 pips

Alternative

Sell 1 month 20.0000 USDMXN put
Receive 880 pips

Spot ref.: 20.3500Source: 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

Market Pulse – Weekly Market Insights Newsletter (16/05/2022) | crypto.com

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