FX Options Insight 11/09/24
Before Wednesday's slightly softer-than-expected data, the initially mild U.S. CPI FX volatility risk premium was somewhat greater, which increases the likelihood of a 25 basis point U.S. rate drop rather than a 50 basis point one next week. The USD/JPY pre-data premium increase occurred after additional JPY strength moved the pair closer to 140.00 in Asia, with higher dates as well. Before easing back during the spot recovery, one-month expiry implied volatility increased by 1.0 to the mid-13s, and one-month risk reversals were paid 2.2 JPY calls over puts. Even while it is less than it was prior to Friday's U.S. NFP data, the ECB policy decision from Thursday helps to justify a higher FX volatility premium in overnight EUR/USD options.
After the U.S. CPI, the EUR/USD fell, but it was still within the huge 1.1000-1.1100 option expiry zone, where 13 billion euros are set to expire after the ECB between 1.1000 and 55. The EUR/USD pair's fall is still more susceptible to risk than its upside, as evidenced by outright flows and risk reversal pricing. To emphasize its value potential, the GBP/USD 1-month expiry implied volatility has dipped to the mid-6s and converges with a marginally firmer 1-month historical volatility. One-month AUD/USD options have a comparable value condition, with implied volatility having stabilized in the middle of its previous 9.0–10.0 range. The U.S. Fed's and the UK BoE's policy announcements on Thursday and the Bank of Japan's on Friday of the following week are among the one-week option expiries.
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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!