FX Options Insights 09/08/24
Recent sessions have seen some notable fluctuations in FX option premiums due to carry trade unwinding and sharp swings in risk appetite.
All over, implied volatility surged to new longer-term highs on Monday, and even with the following losses, it is still higher than previous peaks.
Despite the setbacks, options tied to JPY and CHF produced some of the largest implied volatility gains and continue to outperform their peers. The 1-month implied volatility for the USD/JPY pair hit new highs since January 2023 of 16.0 from 11.35, and it is now at 12.0. The one-month implied volatility of USD/CHF increased to 10.0 from 7.0, setting new records since March 2023 and marking the largest premium to 1-month EUR/USD since 2015. Additionally, the implied volatility premium for JPY and CHF calls over puts in risk reversal futures increased significantly.
The 1-month implied volatility for EUR/USD increased from 5.1 to 7.1, but it has since almost completely reversed as the spot price has returned to levels that are quite familiar and there is no directional risk premium on near-dated expiry risk reversals. Next week sees a number of significant strikes expire in EUR/USD and other pairings, which might potentially aid in drawing in and containing FX.
Since worries over a possible U.S. recession drove recent FX swings, markets will be closely watching U.S. data and next week's CPI. Option dealers are attempting to reduce the daily costs of holding bullish option positions as risk appetite returns temporarily, while simultaneously grappling with the potential of increased FX volatility if estimates prove to be inaccurate.
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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!