FxWirePro: USD/CHF OTC pin risk at 0.9780, 1W risk reversals and tepid IVs despite SNB’s monetary policy uphold OTM calls writers advantage

Let’s have a glance through IVs, risk reversals, and market pin risk before we begin with the selection of right option instrument.

The current ATM implied volatilities have slipped below 10% after SNB maintained status quo in its monetary policy, (unchanged rates at -0.75%), 1w tenors have also reduced to 9.05%. Whereas 1w ATM calls are priced at 29.6%.

While, risk reversals of 1w and 1m tenors have also been unchanged, so bearish hedging sentiments is still visible in this pair’s OTC, on the other hand, spot FX has been moving in sync with the market pinned risks at the strikes of 0.9780 and tepid IVs. These strikes indicate sizeable open interest close to the current forex spot rate.

We see no significant changes in 1m – 3m bearish hedging sentiments in OTC FX market of this pair. Accordingly, we reckon it would be wise to capitalize on these indications to hedge downside risks

Positions of significant size in the forex options market can have an influence on the underlying forex spot rate.

FX Options strikes in large notional amounts, when close to the current spot level, can have a magnetic effect on spot prices. That is, the spot may trend around those strikes as the holders of the options would aggressively hedge the underlying delta.

Thus, we think that it is the right time for writing the overpriced out of the money calls with narrowed expiries.