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Jan 07 - 11:55 AM

EUR/USD - FX Options Wrap - EUR/USD Leads Collapse In Volatility Premium

By Richard Pace  —  Jan 07 - 09:53 AM

FX option implied volatility is under the cosh this week, with EUR/USD leading a

broader decline.

Although later denied by Trump, it was Monday's Washington Post story about the potential for watered-down trade tariffs which hurt the USD and encouraged fresh risk taking, to the detriment of long implied volatility positions. Option sellers were also encouraged by the fact that many implied volatility curves were trading at long term highs since the U.S. election.

Benchmark EUR/USD 1-month implied volatility eventually hit 8.3 on Tuesday from recent and 2-year highs at 9.1, while 1-year traded 7.6 from 8.1. Traders are said to be buying shorter dated high strikes in the 1.0500-1.0600 region, which would cover any further short term spot gains. Dealers also reported some paring of near term expiry strikes toward 1.00.

GBP/USD 1-month expiry implied volatility fell from 18-month highs at 9.1 to 8.4 and 9.0 to 8.6 in 1-year. AUD/USD 1-month from new post U.S. election highs at 11.25 to 10.25 and 1-year from long term highs at 11.0 to 10.3. USD/JPY 1-3-month implied volatility was already under pressure and is now revisiting its post U.S. election lows since July.

Shorter dated expiry option implied volatility has also suffered, albeit to a lesser extent as the risk of Friday's U.S. NFP data to short term FX realised volatility remains a factor.

Deeper implied volatility declines may prove more limited as traders revaluate the risk versus reward of current levels ahead of more data evidence for interest rates and the impact of the incoming U.S. president's policies.
Implied vol and risk reversals


3-month expiry FXO implied volatility


(Richard Pace is a Reuters market analyst. The views expressed are his own)

Source:
London Stock Exchange Group | Thomson Reuters

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