Singapore's Q2 GDP growth alert overpriced USD/SGD ATM calls; spreads also seem expensive

The Singapore's Q2 GDP showed a deeper contraction of -4.6% QoQ SAAR (+1.7% YoY) over previous quarter which is well below forecasts at 0.9%. The fall reversed a 4.2% gain in Q1.

A glimpse on currency derivatives: (USD/SGD)

Technicals suggest uptrend remains intact, despite a healthy uptrend for SGD, the currency may now tend to experience some sort of weakness caused by its fundamentals.

At the moment in our opinion ATM calls are trading at higher premiums, for instance, let's consider debit call spreads that involves buying a call (either ATM or ITM) and sell another Call (OTM) with a higher Strike Price with the same expiration date for a net premium payable.

Although this strategy seems a bit expensive as the NPV of this strategy does not suggest optimal or fai option premium but for aggressive traders it still looks profitable scheme. Hedgers who are having risky FX exposures can deploy this for uncertain upswings on this pair.

NPV of this spreads signifies costlier premiums almost more than 60% of NPV.

The higher theta embedded in short term options seems to be the reason for the outperformance approximately twice the amount of premium is collected versus monthly maturity. While shorting an option the Vega of a short position is negative with an increasing implied volatility is not favorable for the objective of this strategy.

Thus, contemplating the weaker fundamentals, currency may discount premiums in option market at any point of time, could even be abrupt discounts.