A EUR/USD breach of 1.20 EUR/USD option barriers could increase volatility and send it lower, but there are options to protect against that.
Implied volatility is only marginally higher so far, but can increase below 1.20, making options more expensive and rewarding those holding them, even with a cash hedge.
Risk reversals show the current implied-volatility premium for EUR puts over calls at new highs since June.
It's not excessive, yet, but shows EUR/USD downside is considered increasingly vulnerable and reinforces expectations that implied volatility will gain as EUR/USD falls nL1N2K80E5
One-month 1.20 EUR puts give holders the right to sell EUR/USD at 1.20 at expiry - they cost $63 pips, or drop the strike to 1.1900 and shorten the expiry to two-week, it's $18-pips.
Those who think EUR/USD's downside is limited might add a knock-out trigger below the sell strike - one-month 1.20 with a 1.1800 knock-out costs just 15 pips, but kills the option if 1.18 trades.
Expiries, strikes, and barriers can all be tailored to suit.
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