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Jan 12 - 06:55 AM

USD/JPY - COMMENT-Downside USD/JPY Warnings From The FX Options Market

By Richard Pace  —  Jan 12 - 04:40 AM

Option market prices and trade flows flag growing concerns about renewed JPY gains, especially against the U.S. dollar.

Today's report from Japans Yomiuri newspaper that the BOJ will review side-effects of massive easing at its Jan.
18 meeting has boosted JPY and fuelled end-user demand for options, especially those with downside strikes.

Options thrive on volatility, which they gauge with implied volatility when setting premiums.
No surprise then, to see implied volatility on options expiring after the BOJ meeting next week being marked ever higher. Broader JPY related implied volatility with 1-12-month expiries have since recovered most of the losses seen this week.

While demand for implied volatility is an indicator for uncertainty and volatility risk ahead, the emphasis on downside strikes would suggest greater concerns lie in that direction.
The implied volatility premium for JPY calls over puts (USD/JPY downside vs upside strikes) as shown by 1-month expiry risk reversals traded in very large amounts since that BoJ news article.
One buyer paid a 1.4 implied volatility premium for JPY calls over JPY puts.



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Source:
Refinitiv IFR Research/Market Commentary

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