FXO Market Update – Nov 03

FXO Market Update - Nov 03 by Michael McKenna
US election day is here. O/N volatility for the election has gradually come lower over the last month and market is now pricing in around 1% move in both EURUSD and USDJPY.

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 have finally arrived at the much-anticipated US election. USD has traded stronger over the last week with EURUSD down to 16-handle and USDJPY has moved up from the 104 support to currently trading around 104.70.

Vols for the election have gradually been trading lower over the last months but we have seen a small pick up of vols over the last days as market is doing the last adjustments to their positions. The table above shows the O/N forward vol and the implied expected move for the election day as it was priced on 3 August and 8 October and where it is trading today. USDCNH is the only pair that trades at the highest vol level since August while UDSJPY is significantly lower than where it traded in August. The higher O/N vol in USDCNH  is mainly due to the higher underlying vol after China removed the counter cyclical factor from the fix last week.

Notable is the O/N risk reversal is priced around flat in EURUSD and GBPUSD indicating no directional bias from the market. While risk reversals in USDJPY and AUDJPY is priced high for the downside and the USDCNH is priced high for the topside, all in normal risk off fashion, indicating the demand for heading against a contested result.

Flow in the market has been mixed and we have not seen any dominant trade over the last days except for some demand to buy short dated topside USDJPY. As we have discussed in the previous updates on the election, the market still prefers to own options for next week over buying the O/N due to the risk of a delayed result.

  • 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