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Nov 06 - 08:55 AM

EUR/USD - COMMENT-EUR/USD FX Options Are Flashing Good Value

By Richard Pace  —  Nov 06 - 06:50 AM

EUR/USD FX options implied volatility has been under pressure and is now flashing good value against its fair value measures.

FX implied volatility is the FX options market gauge for future realised volatility expectations, with any disparity between the two therefore creating a trading opportunity.
In other words, a perfectly priced option would see its realised volatility match implied volatility by the expiry date.

Historic FX volatility is realised volatility over a particular time frame in the past and can provide a fair value measure for future realised and therefore, implied volatility.

EUR/USD implied volatility is now trading well below historic volatility across much of the 1-week-12-month expiry curve to flag the value potential.
If future realised volatility matches past realised volatility then options bought at a lower implied volatility will not only cover the premium, but also return a profit.

The benchmark 1-month expiry EUR/USD implied volatility is trading just above its long term lows at 6.0 from June 2023 and January 2022 prior, while 1-month daily historic/past realised volatility is up at 7.35.

One-year expiry implied volatility at 7.0 compares with 1-year historic volatility at 7.4.
FX options flag concerns about deeper USD declines nL1N3C70L9

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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