FX Options Insights 07/11/24
Dealers utilise implied volatility as a stand-in for FX volatility, which is an unknown but important component of an FX option premium. Since Thursday's UK and US policy decisions are now included in overnight expiry options, their implied volatilities may provide hints about the anticipated FX volatility reaction. This week's U.S. election saw extremely high overnight implied volatility due to close polling and a binary outcome, which increased the risk of the foreign exchange market. It is still high as traders await the two next central bank meetings, even though it has since weakened. The implied volatility for the USD/JPY overnight is 20.0, which is 128 JPY pips higher or lower than the break-even point for a straightforward vanilla straddle option. The GBP/USD implied volatility incorporates both U.S. and UK rate decisions, but it can only match the September 18 Fed inclusive peak at 17.0 or 92 USD pips in either direction. The overnight EUR/USD implied volatility is 15.0 (67 USD pips). FX market responses may be constrained by the 25 basis point rate cuts that the U.S. Federal Reserve and the Bank of England are anticipated to announce on Thursday. Elevated option premiums, however, indicate that traders of FX derivatives are nonetheless vigilant about possible volatility.
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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!