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Mar 15 - 06:55 AM

EUR/USD - COMMENT-Have Option Dealers Mispriced ECB Risk To EUR/USD?

By Richard Pace  —  Mar 15 - 06:00 AM

Derivative traders are reportedly selling very short dated EUR/USD FX options that capture Thursday's European Central Bank policy announcement, which might suggest they think that related FX volatility risk is overpriced.

Very short dated expiry FX options benefit most from actual spot volatility, which is why their implied volatility (that determines the premium) is typically higher ahead of major events.
Option holders can profit if actual volatility outperforms implied and vice versa.

EUR/USD implied volatility is broadly lower after Tuesday's U.S. CPI data was in-line and as SVB contagion fears abate, although overnight (next working day) expiry losses were more limited to highlight the perceived ECB volatility risk.
From double its recent 11.0 average before the CPI data, overnight expiry implied volatility opened at 18.0 on Wednesday before quick-fire sales to 16.5 so far.
In premium/break-even terms for a simple vanilla straddle - 16.5 implied volatility is $74-pips in either direction from $100-pips at 22.0 before CPI and $50-pips at the 11.0 average seen in early March.

A continuation of EUR/USD holding familiar ranges can favour range binary options.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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