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Implied volatility across major currency pairs is hovering near long-term lows, allowing analysts and traders to gain a clearer understanding of market risk sentiments. This environment presents opportunities for low-cost option strategies that could provide appealing returns if volatility increases.
Specifically, the behavior of overnight expiry options suggests there was no noticeable volatility risk premium in anticipation of the U.S. Producer Price Index (PPI) release on Wednesday. There was only a slight rise in implied volatility ahead of the Consumer Price Index (CPI) announcement on Thursday. The PPI figures came in lower than expected, but the US dollar's minimal response aligns with the subdued pricing indicated by the options. Notably, the options market seems to suggest that the forecast for Thursday’s European Central Bank (ECB) decision is likely to be viewed as a non-event.
Looking forward, one-week expiry options will encompass the U.S. Federal Reserve's policy meeting scheduled for the next Thursday. While there could be some uptick in volatility, it is anticipated to be limited since the market has already fully baked in expectations for a 25 basis points increase and further hikes in subsequent meetings.
As for currency pairs, the AUD/USD is currently testing the 2025 peak around 0.6625. A breakthrough above this threshold could result in additional gains, potentially driving the currency pair toward 0.6700 and beyond. In this scenario, implied volatility could become more desirable, benefiting those holding higher strike call options. These positions could be financially enhanced by writing lower strike options to offset the costs of the higher strike positions.
Meanwhile, Japan’s Liberal Democratic Party (LDP) election, set for October 4, is likely to keep a premium in options expiring shortly thereafter, with a preference for higher strikes. Additionally, there has been significant interest in JPY call options following recent comments hinting at possible tightening measures from the Bank of Japan (BoJ). Consequently, the benchmark 1-month implied volatility has increased, defying the general downward trend in G10 currencies, reaching a five-week high of 10.2 on 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!