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Oct 26 - 07:55 AM

EUR/USD - COMMENT-EUR/USD FX Options Could Prove A Winning Trade

By Richard Pace  —  Oct 26 - 05:45 AM

FX options thrive on volatility, regardless of direction, and current conditions before impending event risk suggest this could prove a winning trade for EUR/USD.

Dealers say current FX trading conditions are thin before a European Central Bank policy announcement on Thursday and especially next week's U.S election -- and less participation will increase volatility potential.

Implied volatility gauges actual volatility expectations, and it's already much higher, as dealers sought value from longer-term lows amid last weeks EUR/USD's renewed gains toward 1.1900, and any setbacks are likely to be limited now.

Consider a two-week expiry FX option - implied volatility up from 6.2 to 8.6 since capturing the U.S election, to flag the perceived event risk, and demands a premium for a simple vanilla straddle of 160 USD pips.

Traded in conjunction with a constantly adjusted cash hedge to offset any EUR/USD directional exposure and monetise actual volatility, the owner hopes actual volatility will outperform implied, banking more than 160 pips before expiry.

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EUR/USD 2-week implied volatility Click here

Source:
Refinitiv IFR Research/Market Commentary

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