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Feb 02 - 08:55 AM

EUR/USD - COMMENT-Options To Protect Increasing EUR/USD Downside Risk

By Richard Pace  —  Feb 02 - 07:24 AM

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.

For more click on FXBUZ

EUR/USD benchmark 1-month implied volatility Click here

EUR/USD 1-3-12-month expiry option risk reversals Click here

Refinitiv IFR Research/Market Commentary


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