June 16 (Reuters) - FX options are forward looking and thrive on volatility and rapid directional moves, providing a sentiment indicator and a window to future expectations. Despite EUR/USD reaching new 3-1/2 year highs at 1.1632 last week, since then there's been an increase in demand for downside strike options with sub 1-month expiries.

EUR/USD has risen from levels below 1.1000 since U.S. President Donald Trump announced reciprocal tariffs on trading partners on April 2. In that time, options have been buying a wealth of strikes to benefit from further FX gains, many indicating the potential for EUR/USD to reach 1.2000 by the end of 2025.

However, there's been renewed demand for EUR put/USD call (downside strike) options over the last couple of sessions - many with strikes in the 1.1400-1.1300 zone and expiries over the next month. There was also a wind-change in the benchmark 1-month expiry 25 delta risk reversal on Friday - trading its lowest implied volatility premium for topside over downside strike options since April 2 at 0.35. That came just 24 hours after huge amounts of topside strikes were bought at 0.6.

The risk of escalation in the conflict between Israel and Iran is a key concern for traders and a primary driver behind the demand for EUR put/USD call options. Such tensions could reinforce the U.S. dollar's safe-haven appeal, potentially boosting the value of these options if the situation deteriorates.
EUR/USD risk reversals

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