Guide to Forex Options Weekly Forecast Report

We use FX Options Risk Reversals data to fill in the gaps. Historical relationships show that risk reversals track Non-Commercial positioning as measured by the COT. Thus we are able to track positioning data as provided by the COT, comparing it to sentiment in FX Options markets.

Our DailyFX Volatility Indices are a measure of volatility expectations through specific time frames. In forex options markets, the price of an option depends on several different factors. The most obvious is always going to be the strike price—the price at which the put or call option may be exercised by the purchaser. Another very important determinant of options prices is volatility expectations of the underlying currency pair—also known as the Implied Volatility.

Our [B]DailyFX Volatility Index Percentiles [/B]measure the implied volatility levels of the four major currency pairs plus the Canadian Dollar. The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past [B]90 [/B]days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

[B]Risk reversals [/B]are a measure of trader sentiment as seen through options prices. Volatility is a major determinant of options prices. Risk reversals measure the difference between volatility levels for out of the money Puts and Calls. If demand for out-of-the-money call options is stronger than demand for the equivalent puts, options traders are on aggregate bullish a given currency pair and are willing to pay more for calls. This makes Risk Reversals positive.

The percentiles you see in the table above measure the level of risk reversals as they relate to their [B]250 [/B]trading-day range. If the percentile is close to 100%, then markets have grown very bullish the currency pair as it relates to the past 250 trading days. If markets are growing increasingly bearish, then this number will likely be closer to 0 percent. This way we can get a good grasp of which way sentiment has been leaning in either direction.

The above is a combination of COT data and aforementioned FX Options Risk Reversal percentiles. The “[B]Net Non-Commercial Positions[/B]” field is quite simply subtracting Non-Commercial Short positions from Non-Commercial Longs.

The [B]1-Week Risk Reversals [/B]and [B]3-Month Risk Reversals [/B]lines measure the 250-trading-day rolling percentiles of 1-week and 3-month FX Options on the currency pair. They tell us how bullish or bearish options traders currently stand in relation to the calendar year.