EUR/USD FX options turned bullish last week, raising prices for upside protection as demand for EUR call strikes increased nL1N2HS0SW, but that pricing has peaked for now, suggesting the options may see limited potential for the current rally to extend much further.
Implied volatility, which gauges future actual volatility and determines option premium, fell from 8.5 to 6.5 after initial U.S. election volatility on Nov.
3-4, before regaining a 7.3 peak in Asia Monday - it's been sold at 6.9 in early London.
Risk reversals saw EUR calls (topside strikes) regain a 0.35 premium over EUR puts (downside strikes), but that has also now peaked.
A EUR call risk-reversals premium would typically lift implied volatility as the EUR/USD spot rate gained, so the fact traders are choosing to sell implied volatility fits with the narrative that EUR/USD spot gains may be peaking for now.
There's a massive 3.1 billion euros at 1.1900 expiry today, the hedging of which can contain and cap price action near term nL1N2HV0AZ
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