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Jan 28 - 08:55 AM

EUR/USD - COMMENT-Low Cost Options To Hedge A EUR/USD Fall

By Richard Pace  —  Jan 28 - 07:10 AM

EUR/USD 1.2000 is a big option barrier level and one that could increase volatility and downside potential if breached.
Simple, low cost options can protect against that.

The FX options market recognises the downside risk, but price action suggests 1.20 is not in imminent danger, leaving plenty of scope for prices to increase should it break nL1N2K30UA.

A simple vanilla EUR put gives holders the right to sell EUR/USD at a predetermined level and expiry for an up-front premium.
It would increase in value with higher implied volatility and lower spot.
Such options can be cheapened significantly by adding a knock-out barrier below the strike level, but the option is dead if that barrier is touched.

However, a plain EUR put vanilla option, traded in conjunction with a regularly adjusted and opposing view in the cash market, can offset any premium, even if spot goes higher.

It relies on actual volatility matching the implied volatility agreed when the option was struck.
If EUR/USD falls and actual and implied volatility increase, so will the profit potential.

For more click on FXBUZ



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

Benchmark 1-month EUR/USD implied volatility Click here

EUR=EBS Click here

Source:
Refinitiv IFR Research/Market Commentary

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