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Jan 18 - 08:55 AM

EUR/USD - COMMENT-Protection Options As Big 1.20 EUR/USD Barriers Loom

By Richard Pace  —  Jan 18 - 08:28 AM

EUR/USD's slow decline has left bulls wary nL1N2JT0P4, but it's caused little panic so far.
That could change if big option barriers and related stops are taken out at 1.20 and below, fuelling volatility and potential losses.

Some simple options can cover this eventuality - they only risk an upfront premium and will remain in play until expiry, unless sold prior.

Options that give holders the right to buy or sell EUR/USD at a fixed strike and maturity for an upfront premium are typically hedged with cash to limit exposure, but they capture increased volatility (actual or implied) nL1N2JQ0U8.

With EUR/USD at 1.2060, a one-month-expiry 1.2000 EUR put/USD call option costs $64 pips, or one-week costs $22 pips premium.
Both allow the holder to sell EUR/USD at 1.20 at expiry.

If traded in conjunction with a cash hedge to play the volatility angle, holders would be less exposed to FX rate, but looking for a 1.20 break to fuel actual and implied volatility, raising the cost of the option and bringing unlimited profit potential.

For more click on FXBUZ

EUR=EBS Click here

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

Refinitiv IFR Research/Market Commentary


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