A lack of EUR/USD volatility on which FX options thrive has knocked their premiums to the lowest levels in a year, including those that would benefit from a EUR/USD setback, making downside hedges cheap.

Implied volatility measures actual volatility expectations and risk reversals are an option contract that benefits from volatility in a particular direction.
Benchmark 1-month implied volatility trades at its lowest level since February 2022 and 1-month 25 delta risk reversals have erased almost all of their longstanding EUR put/USD call premium (EUR/USD downside versus upside strikes).

If EUR/USD were to drop, then risk reversals should recover some EUR put premium and lift broader implied volatility, increasing the price of options and rewarding holders.

EUR/USD met solid resistance ahead of well touted 1.1100 barrier options and has since dropped back under 1.1000, which might worry EUR/USD bulls.

Owning downside strike options only risks an up-front premium, while attaching a knock-out trigger below the strike would reduce that premium further, although the option is dead if the trigger level trades.

One U.S. investment bank turned bullish on the U.S. dollar last month and targets EUR/USD 1.0300.

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