FX options use implied volatility to measure expectations of the actual FX volatility on which they thrive, and those in EUR/USD are at very telling levels.
Actual volatility is an unknown parameter when pricing a forward-looking FX option, so dealers use implied volatility instead.
Any difference between implied and actual volatility therefore creates the trading opportunity.
The benchmark 1-month expiry EUR/USD implied volatility traded another long term low at 6.15 on Friday - levels last seen in February 2022.
Other dates also posted fresh 1-year lows before recovering slightly this week.
Historic volatility measures actual volatility over any timeframe in the past, and can therefore provide a fair value measure for implieds.
One-month daily historic, based on a once daily FX spot calculation, is just 5.5, and suggests that 1-month implied can fall even further.
If the impending U.S. and euro zone central bank policy meetings can pass without volatility and any signs of a break from familiar ranges, then implied volatility would have the potential for even deeper declines as markets head toward the traditional summer lull.
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1-2-3-month expiry EUR/USD FXO implied volatility Click here
EUR/USD 1-month expiry FXO implied versus historic volatility Click here