FX Options Insight 09/09/24
There has been a slight change in sentiment since the muddled U.S. jobs data released on Friday, which decreased the likelihood of a 50bps rate cut by the U.S. Federal Reserve on September 18.
The demand and premium for FX options to safeguard against near-term FX volatility and USD weakness were robust prior to Friday's mixed U.S. jobs data. However, they have since declined rapidly, despite the imminent U.S. CPI data.
The topside momentum of the EUR/USD pair has diminished, as the 25 delta risk reversals for the 1-month expiry have returned to neutral from 0.2 EUR put/USD call on Friday. Additionally, the benchmark 1-month expiry implied volatility has decreased from 6.3 to 5.7.
The topside of the GBP/USD was never a significant focus for FX options. When spot peaked at 1.3266 on August 27, one-month expiry risk reversals were unable to maintain a brief and long-term high topside strike premium. The contract has maintained a modest downside strike premium since then. The implied volatility of the benchmark 1-month expiry has decreased from 7.3 to 6.8.
Despite the fact that the timing of the 140.00 barrier breach has been postponed, option trade flows and downside strike premiums indicate that the 140.00 level is still considered vulnerable. USD/JPY was in line to breach the 140.00 barrier following the NFP. The implied volatility of the USD/JPY 1-month expiry rose from 11.9 to 13.75 last week and has been trading in the mid-12s since. This indicates that the pair maintains a substantial premium over its G10 FX counterparts and has a stronger correlation with the USD and a broader risk sentiment.
The FX volatility risk premium for Wednesday's U.S. CPI data is significantly lower than the level observed prior to Friday's NFP. Consequently, this week's larger FX option strike expiries and associated hedging flows should be able to operate more freely within their current ranges.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!