FX Options Insights 14/03/25
Implied volatility indicates market expectations of actual volatility and is essential for option pricing. It has notably decreased from recent and medium-term peaks, especially in sub-three-month expirations, which could create an appealing risk-reward scenario. Naturally, a decline in implied volatility suggests lower realised volatility in the FX market, so these declines are reasonable while FX spot markets remain stable and risk appetite improves. USD/JPY implied volatility was leading the recent increase, but the 1-month expiry has completely reversed a 2.0 spike to 12.4. The 1-month expiry encompasses several volatility risk events, including central bank policy decisions, important US employment and inflation statistics, and the April 2 reciprocal tariff deadline, underlining its potential significance. EUR/USD could not maintain a retest of the 1.0900 level following a news piece regarding a possible agreement in the German government on extending the debt ceiling. Implied volatility has remained nearly stable after its pullback from its recent highs in January (1-month based 7.85 from 9.2). However, sub 3-month EUR/USD risk reversals are revisiting a downside strike premium, and there has been a modest demand for outright downside strikes through vanilla and EUR put trigger options since mid-week. Other G10 currency pairs have experienced a drop in their implied volatilities recently before encountering slight buying interest and potential value levels.
Notable EUR/USD expiries for the upcoming week begin on Monday with 1.0820-30 strikes amounting to 1 billion euros. On Tuesday, the expiries are 1.0745-55 (3.2 bln) and 1.0900-10 (1.5 bln). On Wednesday, there are 1.0750 (1.6 bln), 1.0800 (1.6 bln), 1.0850 (1.1 bln), 1.0900 (1 bln), and 1.0950 (932 million). Thursday has expiries at 1.0700 (1 bln), 1.0740-50 (880 mln), 1.0790-1.0800 (1.6 bln), 1.0870-75 (1.6 bln), and 1.0900-10 (2.6 bln). On Friday, strikes include 1.0700 (794 mln), 1.0785 (802 mln), 1.0800 (1.3 bln), and 1.0900 (1.1 bln).
For the USD/CHF pair, significant strike expiries occur on Tuesday at 0.8800 worth $760 million and on Friday at 0.8970 valued at $920 million. Additionally, on Friday, there are considerable EUR/CHF expiries at 0.9525 (1.2 billion euros) and 0.9675 (1 billion euros).
This week, there isn't much activity regarding GBP-related option expiries, apart from 1.1 billion euros at the 0.8525 EUR/GBP on Friday.
Key AUD/USD strikes fall on Tuesday at 0.6320-30, totaling A$1.8 billion; more are set for Wednesday at 0.6230 (A$1.6 billion) and 0.6340 (A$1.4 billion), and on Thursday at 0.6400-05 (A$1.5 billion). A notable NZD/USD strike is scheduled to expire on Thursday at 0.5670 for NZ$1.5 billion.
For the USD/CAD, larger strikes are expiring on Tuesday at 1.4270-80 worth $910 million, on Wednesday at 1.4315-25 (1 billion) and 1.4565 (1.6 billion), on Thursday at 1.4420-30 (813 million), and on Friday at 1.4280 (886 million), 1.4295 (1 billion), 1.4300 (1.7 billion), and 1.4565 (1.1 billion).
The biggest USD/JPY strike expiries this week so far include Monday at 149.00 (1 billion), Tuesday at 148.50 (1.3 billion), 149.00 (950 million), and 150.00 (1.4 billion). On Thursday, strikes are at 147.80 (540 million) and 150.70 (850 million), while Friday features expiries at 147.00 (1.5 billion), 149.00 (1.8 billion), and 150.00 (1.1 billion). These mentioned strikes could increase in size prior to expiration, and new strikes are expected to emerge as the week continues.
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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!