FX Options Insights 07/01/25
This week, FX option implied volatility is facing pressure, particularly with EUR/USD leading a broader downturn. A story from Monday's Washington Post regarding the possibility of softened trade tariffs, which was later refuted by Trump, negatively impacted the USD and spurred fresh risk-taking, adversely affecting long implied volatility positions. Additionally, options sellers were motivated by the observation that many implied volatility curves were at long-term highs since the U.S. election.
The benchmark EUR/USD 1-month implied volatility reached 8.3 on Tuesday, down from recent and 2-year highs of 9.1, while the 1-year volatility decreased from 8.1 to 7.6. Traders are reportedly purchasing shorter-dated high strikes in the 1.0500-1.0600 range to hedge against any potential short-term spot increases. Dealers also noted some adjustments in near-term expiry strikes towards 1.00.
For GBP/USD, the 1-month expiry implied volatility dropped from 18-month highs of 9.1 to 8.4, and from 9.0 to 8.6 for the 1-year. AUD/USD 1-month implied volatility fell from new post-U.S. election highs of 11.25 to 10.25, and the 1-year dropped from long-term highs of 11.0 to 10.3. USD/JPY 1-3 month implied volatility was already under strain and is now approaching its post-U.S. election lows from July.
Shorter-dated expiry option implied volatility has also declined, though to a lesser degree, as the risk associated with Friday's U.S. NFP data continues to influence short-term FX realized volatility. Further declines in implied volatility may be limited as traders reassess the risk versus reward of current levels in anticipation of more data regarding interest rates and the effects of the incoming U.S. president's policies.
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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!