The EUR/USD options market shows a big reduction in the size of existing coverage below 1.0850 barriers, compared with that above, which could help to fuel deeper declines. It would also increase volatility if 1.0850 is erased. The proximity to a major Fibonacci retracement level at 1.0863 -- 76.4% of the 1.0340-1.2556 2016-18 rally -- makes 1.0850 more significant. A break below it wouldleave little to prevent a full retrace to 1.0340.
There are just 25 billion existing option strikes within 200-pips sub 1.0850, compared with 100-billion above.
That reduces the usual cash hedging activity or liquidity associated with existing options should EUR/USD fall, with the barrier removal adding to short gamma exposure.
So far there's been no rush to hedge this risk, with buyers actually taking advantage of the dip, and option levels well below recent highs nL2N26L0AL.
However, while EUR/USD struggles to recover, the downside remains vulnerable.
Buying EUR put options would protect against a fall before volatility prices rally if this eventuality is realised.
One-month 1.08 EUR puts risk only their 28 pip premium, but would gain in value if spot fell toward or through 1.0800.