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Feb 05 - 07:55 AM

EUR/USD - COMMENT-FX Options Highlight EUR/USD's Predicament

By Richard Pace  —  Feb 05 - 05:48 AM

EUR/USD started 2021 with a focus on 1.2500, but the setback through 1.2000 barriers now questions the conviction of the long EUR/USD trade.
It also raises fears of further declines - a predicament reflected in the FX options market.

Options thrive on volatility and rapid directional moves.
Dealers will increase implied volatility premium when they think actual volatility might outperform, so pandemic lows speak volumes.

Risk reversals show which side of the market dealers feel is most vulnerable, charging an implied volatility premium for option strikes in that direction versus the other.
Benchmark one-month expiry risk reversals were 0.6 premium for EUR calls over puts (topside) in December.
Now they're 0.3 EUR puts over calls - its highest downside premium since May 2020.
That reflects heightened downside fears, but 0.3 isn't excessive, with some supply noted, too.

Traded volumes have decreased, and while directional flows show some demand for options in both directions, there's a clear lack of overall conviction.
Even Friday's NFP data is failing to excite FX options nL1N2KB0MJ.


For more click on FXBUZ












EUR/USD 1-month implied volatility Click here

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

Source:
Refinitiv IFR Research/Market Commentary

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