FXO Market Update – Nov 12

FXO Market Update - Nov 12 by Michael McKenna
XAGUSD vols are currently the most overpriced when comparing to realized vol. Risk reversals are on the high end, making XAGUSD calls very pricy.

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.

XAGUSD has traded in a relative narrow range between 22.50/26.00 since mid-September. We saw some high volatility just after the US election, like with most of the market, but spot is now back to the middle of the range again after testing the highs.

While most of the vols have been market lower when the US election risk premium is gone, XAG vols still trades around pre-election levels. XAGUSD 1 month currently trades around 39 vol, same level as on the 4 November. XAGUSD vol is currently the most overpriced vol when comparing to the realized vol, 1 month trades with a risk premium of 4 vol, see bottom left graph below.

1 month risk reversal traded around 4.0 for XAG calls before the election and currently trades around 5.5. We saw a spike in the risk reversal when spot traded up to 26.00 which still has not been adjusted back with spot back down to the middle of the range. 1 month risk reversal traded up to 8.0 back in August when spot was at the highs and traded around 2.0 at the start of the summer.

We prefer to keep a short vol position considering the expensive vol, high risk premium. Selling XAG calls offer best value considering the pricy risk reversal.

Sell 1 month 26.00 XAGUSD call
Receive 5000 pips


Sell 1 month 28.00 XAGUSD call
Receive 2000 pips

Spot ref. 24.30

  • 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