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: EURPLN spot

EURPLN is back up above 4.70 after trading up 1.25% yesterday. Resistance comes in at 4.7250, previous highs from last week and May.

Vols trading higher with 1 month up 1 vol from beginning of last week to trade 9.50. Risk reversals trades 3.25 for topside which is the high end seen over the last months. The risk premium also trades elevated with 1 month currently at 1.75. All the vol components expressing high values, i.e. making EURPLN calls expensive. With that in mind we like to sell EURPLN calls at these levels with strikes above the 4.7250 resistance. Both options below trades around 11.0 vol while the 1 month realized spot vol is 7.75, giving a high risk premium over current spot vol.

Sell 2 weeks 4.7500 EURPLN call
Receive 265 pips

Alternative

Sell 1 month 4.8000 EURPLN call
Receive 330 pips

Spot ref.: 4.7150

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

Source: FXO Market Update June 23 2022 | Saxo Group (home.saxo)