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Nov 19 - 05:55 AM

EUR/USD - COMMENT-FX Option Pricing Shift Flags EUR/USD Warning Signals

By Richard Pace  —  Nov 19 - 03:39 AM

Forward-looking FX options have seen a big shift in pricing and related flow, which should warn those looking for deeper EUR/USD declines to tread with caution.

FX option implied volatility has retreated from Wednesday's new long-term highs as EUR/USD spot recovers from its 1.1263 low, making options cheaper - albeit still well above recent and pandemic-era lows to warn of further volatility risk. nL1N2S90P3nL1N2S913P However, it's the shift in directional premiums and related flow that are flashing warning signals.

Risk reversals show the implied volatility premium for option strikes in the most vulnerable spot direction - they traded their highest EUR put versus call (downside vs upside strike) premium since mid-2020 on Wednesday, but have since fallen sharply.
Benchmark 1-month 25 delta risk reversals fell from 0.6 to 0.25, and 3-month 0.65 to 0.375.
That drop was in conjunction with good demand for outright high strikes around 1.1500 within a 1-2-month expiry horizon.

The recent erasure of 1.1500-1.1300 barrier options has probably left many dealers needing to buy strikes in this area to cover short exposure and can help explain some of the price action.
However, it would also fit with a growing perception that EUR/USD may have found a floor and the risk of a bigger short squeeze may be brewing.


For more click on FXBUZ












EUR/USD 1-3-month expiry option risk reversals Click here

Source:
Refinitiv IFR Research/Market Commentary

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