FX Options Insights
The implied volatility of FX options has risen, attributed to recent gains in the JPY and EUR, alongside a general depreciation of the USD. Following the release of U.S. jobs data, market movements suggest ongoing caution regarding substantial directional trading and foreign exchange volatility, alongside a preference for minimising excessive premium expenditures. Additionally, spot markets appear to be approaching a consolidation phase in the short term.
Implied volatility for sub one-month expirations has declined from last week's peaks across most currency pairs, although it remains elevated compared to levels observed prior to the recent rally. The recently increased topside strike premiums for EUR/USD have diminished in sub three-month expiration risk reversal contracts. The one-month 25-delta risk reversal transitioned from 0.6 EUR puts to 0.6 EUR calls, reflecting the highest topside strike premium observed since 2022, before reverting to 0.1 EUR calls on Monday. Traders continue to expect additional increases for EUR/USD.
In the case of USD/JPY, implied volatility and JPY call risk reversal premiums are performing more favourably, as the one-month 25 delta contract has reached 2025 highs of 1.8 for downside strikes, in contrast to upside strikes. This aligns with the growing demand for direct JPY calls as the market nears the 145.00 option resistance levels.
GBP/USD remains focused on sustaining levels above 1.3000, despite a decrease in implied volatility as spot movements have temporarily halted. One-month benchmark volatility has decreased from 8.6 to 8.1 over the past week. Currently, EUR/GBP is showing a preference for upward movements, and the declines in implied volatility seem to be less significant, with the euro outperforming the pound.
AUD/USD has reverted to approximately 0.6300 following a drop to 0.6185 the prior week, resulting in a decrease in one-month implied volatility from recent peaks of 10.5 earlier in February to 10.2.
Market focus is directed towards the U.S. CPI data scheduled for Wednesday, with expectations that the potential FX volatility risk premium will be evident in the implied volatility of overnight expiration options from Tuesday.
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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!