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FX Options Insights
Implied volatility, which is a measure of the market's expectations of future price fluctuations, is currently softening after a recent spike. However, risk reversals, which assess the relative value of puts versus calls, are showing a slower reaction to surrendering the premium for USD puts, particularly in comparison to the euro. The recent price action in the market indicates a tendency to revert to low realised volatility within familiar ranges, suggesting a dovish stance on the USD.
Specifically, the one-month expiry implied volatility for USD/JPY saw a notable increase, jumping from 9.0 to 10.3 between Friday and Monday. Nevertheless, it has since eased back down to 9.6. Analysts anticipate that this level will find support ahead of the established low range of 16.5-8.7 from July 2025. Despite a general leaning towards JPY strength, the risk reversals also indicate that the premiums are nearing the lower end of long-term ranges, reflecting a lack of strong conviction among traders.
When it comes to EUR/USD, it is viewed as the preferred instrument for traders looking to short the USD. This preference is evident in the swift recovery of topside strike premiums in the aftermath of U.S. jobs data, as indicated by risk reversals. Traders are actively seeking more affordable options instead of traditional vanilla calls, with Reverse Knock-Out (RKO) structures being noted as an economically viable method to hold EUR/USD positions. A significant number of strike expiries this week, particularly in the range of 1.1500-1.1600, are contributing to an overall constraint on volatility.
Benchmark one-month implied volatility levels in major currency pairs, which are trending back toward the lows that were observed prior to the spikes associated with U.S. job data and the announcement of tariffs on April 2. These levels may potentially attract value-seeking investors who are looking to hedge against the next anticipated rebound in foreign exchange 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!