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Jan 26 - 07:55 AM

EUR/USD - COMMENT-EUR/USD Downside Insurance Is Still Cheap

By Richard Pace  —  Jan 26 - 06:19 AM

The cost to protect against a setback in EUR/USD via simple FX options is relatively inexpensive, but that won't last if it breaks lower.

Implied volatility is the FX option market's gauge of actual volatility and determines premium.
It's been trading crisis lows across the majority of G10 FX, but there are justifiable signs of concern nL1N2K10J1.

EUR/USD option premium for EUR calls (topside) is being pared and implied volatility is meeting mild demand nL1N2K10LU.
If EUR/USD extends losses and breaks below 1.2000 barriers/stops, actual and implied volatility would increase, along with premium for downside strike options.

Premiums can be cheapened by reducing time to expiry and placing strikes further from current spot.
One-month 1.20 EUR puts give holders the right to sell EUR/USD at 1.20 on Feb 24 - implied volatility 6.1 and premium $32 pips, or two-month 1.1800 EUR puts at 6.5 vol cost $23 pips.

Buying options only risks the premium paid.
Costs can be completely erased by selling topside options to fund, but that risks losses in the event that EUR/USD ends above those strikes.

For more click on FXBUZ

Benchmark 1-month expiry implied volatility- Click here

EUR/USD 1-3-12-month expiry option risk reversals Click here

Refinitiv IFR Research/Market Commentary


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