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Foreign exchange (FX) volatility, the lifeblood of options trading, remains stubbornly elusive, keeping implied volatility near historic lows and realised volatility even lower. In this subdued volatility environment, spotting elevated premiums is simpler, yet they are few and far between.
One of the rare highlights is Friday's delayed U.S. Consumer Price Index (CPI) release, a key data point during the ongoing U.S. government shutdown. Initially, this event sparked some demand for FX volatility hedges in case of unexpected surprises. However, the lack of interim market movement has dampened the event risk premium. Overnight implied volatility has risen only slightly ahead of the release, especially when compared to past CPI announcements.
For the British pound, the 1-month expiry now factors in the upcoming UK budget announcement on November 26. This has driven up implied volatility and increased GBP put over call risk premiums.
Meanwhile, USD/JPY has clawed back much of its recent losses, but the price action lacks momentum for a significant push higher. Interest in JPY puts/USD calls remains muted, with implied volatility staying low. While last week's premium for JPY calls over puts has faded, the 1-month 25-delta risk reversal still shows a modest 0.5 premium for JPY calls.
As for EUR/USD, it remains hemmed in by large option strike expiries and a tight trading range near 1.1600. Implied volatility has slumped to levels not seen since 2025, and risk reversals are struggling to sustain a bias toward upside strikes, signalling a more neutral short-term outlook.
Turning to AUD/USD, implied volatility continues to face downward pressure as the spot rate hovers around 0.6500. Despite this quiet environment, risk reversals still reflect a strong preference for AUD puts over calls, underlining ongoing concerns about further declines in the currency pair.
Although the current low implied volatility levels might make options appear attractive from a risk-reward standpoint, historical realised volatility tells a different story, dampening their appeal in today’s market conditions.
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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!