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Oct 06 - 07:55 AM

EUR/USD - COMMENT-Cheap Option Bets To Capitalise On More EUR/USD Gains

By Richard Pace  —  Oct 06 - 06:05 AM

A U.S. bank has added to core EUR/USD longs, and FX options are showing more concern about the pair reaching 1.1900 nL1N2GX07V, but cheap option bets are available to capitalise on further gains.

A cash long would work, but risks being stopped if EUR/USD falls back.
Some dealers may be reluctant to buy EUR/USD in the middle of its recent 1.1613-1.1917 range.

Outright EUR calls are expensive, given high implied volatility and topside premiums nL1N2GX064, but that same upside lean can cheapen a vanilla EUR call option if a knock-out barrier is placed above the strike.

With EUR/USD currently 1.1780, a three-week expiry 1.1800 EUR call offers the right to buy EUR/USD on Oct.
27 at 1.1800.
The premium is 78 USD pips (break-even 1.1878).

However, add a 1.20 barrier, and that premium falls to just 14 pips - profit above 1.1814 - as long as 1.20 hasn't traded pre-expiry.

Strikes, barriers and expiries can be tailored to suit, but adding the barrier significantly reduces the premium.
Related comment nL1N2GX097


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Source:
Refinitiv IFR Research/Market Commentary

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