Option markets are now charging a small premium for EUR/USD topside protection, but that doesn't mean EUR/USD will necessarily trade much higher, so option watchers should tread with caution.
Risk-reversal contracts show the EUR put over call (EUR/USD downside) implied volatility premium has been erased in sub-one-month expiry contracts, and they now demand a small EUR call (topside) volatility premium.
The benchmark one-month contract is now just 0.1 implied vols for EUR puts over calls after peaking at 3.0 vols in mid-March.
Demand has also picked up for outright EUR call strikes, which would allow holders to buy EUR/USD at higher levels on a future date.
They would also increase in value if EUR/USD extends higher.
However, demand is still relatively tame and many of these options are likely to be for insurance; market makers need to cover the risk, however small they deem it to be.
Bulls should be wary of big resistance nL1N2D208N, EU's relief fund scepticism nL1N2D10DG, the trend/range nL1N2D209S and the Covid vaccine results nL1N2D20BI.