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FX vols have been perplexingly soft over the past two weeks in the face of escalating trade war rhetoric and equity markets’ jitters have been the talking point de jour in FX option circles.
Please be noted that the above nutshell evidencing ATM implied volatilities of G10 FX universe which are at its least, almost across all the tenors, IVs have been shrinking amid trade clashes between the US and China.
Volatility is the heart and soul of options trading. With the proper understanding of volatility and how it affects your options you can profit in any market condition. The markets and individual asset class are always adjusting from periods of low volatility to high volatility, so we need to understand how to time our options strategies.
When we talk about volatility we are referring to implied volatility. Implied volatility is forward-looking and shows the “implied” movement in an underlying asset’s future volatility.
Low volatility trading is tough for options traders. When markets are calm premiums are small and narrow - meaning that we cannot sell options far from the current stock price.
In such low volatile circumstances, options strategies such as ratio spreads, butterfly & iron butterfly spreads, condor spreads appear to be conducive.
VXY Global has flat-lined around 7.5 over the past month, a period over which announcement of tit-for-tat bilateral tariffs by the US and China has escalated trade tensions (refer above chart), notwithstanding soundbites from administration officials on both sides to soothe market anxieties.
Aside from a brief spike around the VIX shock in February, VXY still remains 1-sigma cheap even versus mundane business cycle drivers, to speak nothing of risk premium for a trade war. Explanations for this inertness that we have encountered are largely unsatisfying. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -114 levels (which is bearish) while articulating (at 08:39 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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