Summary: We have BoJ and ECB on Thursday followed by FED next Wednesday. EURUSD vol curve is very steep with all the event coming up, EURUSD 1 week trades at 14.75 while 1 month trades 12.60.
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: EURUSD spot, Black: EURUSD 1w-1m vol spread
The calendar is packed with central banks the coming weeks, BoJ and ECB is first up on Thursday followed by FED next Wednesday.
USD has traded away from the highs with EURUSD back up just below 1.0200 after trading down to 0.9950 last week. The resistance on the topside comes in at 1.0350 while no major supports before the lows at 0.9950, 1.0000 should not be any major support level after the barriers been taken out last week.
EURUSD vol curve is very steep with 1 week trading more than 2 vol above the 1 month, which is the highest since March and it has only been marginally steeper at a few occasions over the last two years. This is with only ECB and BoJ in the 1 week, FED is in 8 days.
We like to sell the calendar to take advantage of the steep curve. If you think ECB and BoJ wont rock the market while FED could surprise on the hawkish side then you could consider the following trade. Sell 1 week strangle and buy a 1 month put. You will have a cheap put option over FED if spot stay within the strikes of the 1 week for the next week. Risk on the downside is limited as you have the long put in the 1 month against your short put in the 1 week. If spot close above the call strike in 1 week then you will be short spot together with the long put from the 1 month.
Sell 1 week 1.0300 EURUSD call
Sell 1 week 1.0000 EURUSD put
Buy 1 month 1.0000 EURUSD put
Net cost: 18 pips
Spot ref.:1.0175
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
Source: FXO Market Update July 19 2022 | Saxo Group (home.saxo)
