FX options have been positioning for the risk of further gains toward 1.1500 over the coming weeks and months, but demand for this upside protection is faltering now.
That doesn't mean option traders don't still see EUR/USD heading higher over time, but while it struggles to gain any traction above 1.1300, they prefer to hold back and sell some options to cover time-decay costs.
That's apparent when looking at price action.
Implied volatility is easing again - benchmark one-month at-the-money are dropping to recent lows at 6.6 Wednesday, while the premium for EUR calls over puts (the right to buy EUR vs sell it) on one-month risk reversal contracts has dropped back to 0.3 from 0.5 vols.
A massive 2.7 billion euros of 1.1300-10 option expiries nL1N2EF07C and related hedging flows may contain EUR/USD Wednesday.
Forty 40 billion euros over the next two weeks between 1.1200-1.1400 are also helping to contain the pair inside those parameters nL1N2ED07N.
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