FX Options Insights 21/11/24
G10 FX Option implied volatility is well supported by bouts of risk aversion relating to Russia/Ukraine that's underpinning the USD and JPY. The benchmark 1-month expiry is also benefiting from the inclusion of policy announcements from the U.S. and Japan on Dec. 18-19.
USD/JPY was under pressure after the latest comments by BoJ governor Ueda on Thursday, which highlights the sensitivity of this pairing to any clues about impending policy. One-month expiry implied volatility extended its post U.S. election recovery high to 11.9 from 10.35 before Tuesday's BoJ inclusion. The 1-month 25 delta risk reversal traded a new high for JPY calls over puts since September at 1.75, reinforcing the perceived downside risks to USD/JPY spot.
EUR/USD has been contained by billions of euros of nearby strike expirations this week, but price action maintains a strong conviction for deeper declines. Implied volatility is well supported at recent highs as 1-month flirts with an 8.0 handle, having dropped from 9.0 to 6.25 after the U.S. election. EUR/USD risk reversals trade new highs for USD calls over puts since July (downside versus upside strikes), with 1-month 25 delta reaching 0.8 from 0.6 this week, despite spot prices holding above last weeks new long term lows. Friday's euro zone PMI data might be the catalyst for the next EUR/USD leg lower, if it contracts further, with gains for overnight expiry option premiums not complacent about that risk. Overnight expiry is the following working day at 10-am New York/3-pm London, and now includes Friday's PMI data. Its implied volatility has risen from 10.0 to 13.0, with a premium/break-even for a simple vanilla straddle ranging from 44 to 57 USD pips in both directions. That is not small, and it demonstrates the data's perceived potential to boost actual/realised volatility. Other dates' implied volatility has recently been strongly supported. EUR/USD FX options have an implied volatility premium for downside strikes over upside strikes across all maturity dates, as demonstrated by option risk reversal contracts. This premium has risen to new highs in recent trading sessions, dating back to July. Higher implied volatility and downside strike premiums in a generally range-bound FX spot market indicate that traders are becoming more concerned about a deeper EUR/USD collapse, which would increase actual/realised volatility. This scenario is undoubtedly possible if Friday's eurozone PMI data slides deeper into contractionary territory.
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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!