March 14 (Reuters) - FX options serve as a valuable hedge against market volatility, so it was no surprise that USD/JPY option premiums outpaced those of their peers amid recent spot market turbulence. However, USD/JPY has led a broad-based decline in FX option premiums over the past few sessions, bringing current levels into an attractive reward-versus-risk zone.

FX volatility is a critical but unpredictable component of an option's price, prompting dealers to use implied volatility as a proxy. If realised volatility exceeds implied volatility over the option's lifespan—or if implied volatility rises—options can generate profits.

To monetise FX volatility and remove currency risk, the option position must be offset with an opposing and constantly adjusted cash hedge.

For context - the benchmark 1-month expiry USD/JPY implied volatility reached a new 2024 high at 12.4 this week from 10.35 in late February. It has since fully retraced that move, significantly reducing the premium for 1-month expiry options.

There is plenty of FX volatility event risk within the next month to justify holding a 1-month expiry option to capture it. Next week sees central bank policy announcements from the Bank of Japan and U.S. Federal Reserve. The U.S. global reciprocal tariffs on April 2, the monthly U.S. jobs report on April 4 and U.S. CPI data on April 10.

FX options wrap
USD/JPY FXO implied volatility

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