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Nov 02 - 08:55 AM

USD/JPY - COMMENT-USD/JPY Option Traders On Alert For Extreme Volatility

By Richard Pace  —  Nov 02 - 06:50 AM

Implied volatility, a gauge of expected actual volatility, has been marked significantly higher since capturing the U.S election -- a warning of extreme volatility expectations.

One-week-expiry implied volatility has almost doubled, trading above 11.0 Monday, a long-term premium to one-week historic volatility, which is 4.2.

Historic volatility of 4.2 suggests that cash-hedged one-week options over the past week would only have profited by once-daily hedging, if purchased for less than 4.1 implied volatility.

The benchmark one-month implied volatility peaked at 8.5 last week and settled at 8.2.
It's up from 5.5 before expiry captured the election and is 3.4 vols above its own historic measure - also a long-term high versus this fair value metric.

Implied volatility in both contracts trades at the highest since the initial Covid crisis panic in March.

Option dealers are leaning more toward USD/JPY losses than gains, with risk reversals showing a recent increase in volatility premiums for JPY calls over puts.

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USD/JPY 1-week implied vs historic volatility Click here

USDJPY 1-month implied versus historic volatility Click here

Source:
Refinitiv IFR Research/Market Commentary

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