March 13 (Reuters) - Given their forward looking nature, reliance on FX volatility and rapid directional moves, FX options can offer clues about the perceived outlook for a currency pair and there's been plenty of changes in EUR/USD of late.

Implied volatility gauges realised volatility risk and is a key component of an FX option premium, so it was no surprise to see it spike up to highs since January amid the recent EUR/USD rally from the 1.05s to the 1.09s.

Risk reversals charge an implied volatility premium for options in what is perceived to be the most vulnerable direction versus a discount in the other. During the spot rally they rapidly reduced a long standing premium for downside strikes and sub 3-month expiries actually flipped that premium for topside strikes - reaching their highest levels since 2022 and 2020.

The bulk of trade flows were concentrated on buying topside strikes with 1.0800 and 1.1000 strikes and sub 3-month expiries, suggesting that area was an initial target. However, 3-6-month expiry EUR call (topside) strikes with knock-out triggers at 1.1500 were also popular and suggested 1.1500 is seen as a topside limit over the medium term.

However, since EUR/USD faltered in the 1.09s, risk reversals have reversed that topside strike premium and the benchmark 1-month expiry 25 delta contract is now almost flat - so no real bias in either direction. It had flipped from 0.6 EUR puts to 0.6 EUR calls last week. Implied volatility has taken a hit and the 1-month expiry is now below 8.0 from a 9.25 high.

The latest price action shows a market happy to close trades that have returned some decent profits over the last two weeks and also fits with expectations of near term FX consolidation whilst fresh signals are awaited.
EUR/USD risk reversals


EUR/USD FXO implied volatility

(Richard Pace is a Reuters market analyst. The views expressed are his own. Editing by Alison Williams)