The FX options market is already aware of the downside risk to EUR/USD nL1N2JQ0F5, but next week could see it increase, along with actual volatility, given some significant events that might warrant protection.
President-elect Joe Biden's inauguration and Janet Yellen's confirmation hearing for U.S. Treasury Secretary might give them the opportunity to comment on future policy.
A showdown in Italian politics nL1N2JQ0OE and a European Central bank meeting, with EU PMIs in the mix, too.
A simple one-week expiry straddle offers the right to buy, or sell EUR/USD at a set rate (strike) for an upfront premium.
It's a volatility play, so holders will offset strike risk by adjusting an opposing cash hedge as the spot market moves.
At 6.7, one-week implied volatility is in line with one-week daily historic volatility, which suggests fair value.
It means that EUR/USD's actual volatility only has to match its past week's performance to cover the premium with once daily cash hedging, while any increase can bring unlimited profit potential.
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EUR/USD 1-week implied is in line with 1-week daily historic Click here