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 continue to see the event premium for the US election to come lower as Biden keeps a comfortable lead in the polls.
USDRUB has traded higher since the beginning of the summer. Potential sanctions related to the Navalny poisoning and a negative outlook if Biden would win the election has put pressure on RUB. A Biden victory is almost priced in fully by the market by now and the question is if there will be any more negative pressure on RUB if Biden wins. Any sanctions related to the Navalny positioning looks to be target to individuals which shouldn’t have any negative impact on the Russian economy.
USDRUB overshot out of the trendline at the end of September and is now trading close to strong support levels. A Trump victory could take USDRUB quickly lower or a Biden victory could take USDRUB back up to the top of the range. EM has traded strong over the last weeks and RUB has a bit of catch up to do if the positive risk sentiment continues going into the election and its possible we can see USDRUB break lower on back of that.
Both vol and risk reversal trades on the high side due to the election and the high spot levels. The potential big move lower if we break the support and the high risk reversal makes buying USDRUB puts attractive. Call spreads offer good discount compared to buying just a call for a trade higher in USDRUB.
Buy 1 month 76.00 USDRUB put
Cost 10,200 pips
Buy 1 month 78.00 USDRUB call
Sell 1 month 81.00 USDRUB call
Cost 8,700 pips
Spot ref.: 77.15
- 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.