FX options thrive on FX volatility and directional moves, and price action in this EUR/USD derivative is reflecting growing concerns about both.
Implied volatility is the option markets gauge of actual volatility and a key determinant of premium - it's trading at ever new multi-month highs, with a growing additional premium for EUR puts over calls (downside strikes).
The options market was short volatility for months whilst gathering premium from option sales on expectations of familiar ranges holding.
But since the break of 1.1500 barriers dealers are covering those shorts and option end-users are buying downside protection, which is boosting implied volatility and subsequent option premium.
One-month expiry implied volatility saw a significant leap from 5.3 on Monday to 6.3 on Tuesday, initiated by the break of 1.1400 barriers and exacerbated by expiry now capturing December's European and U.S. policy announcements and their related FX volatility risk. nL1N2S70I5
All other expiry dates, which were already on the rise, have extended their own multi-month highs as EUR/USD eyes more downside barriers at 1.1350-00. nL1N2S70KL
Risk reversals charge implied volatility premium for options in the most vulnerable direction and all dates are now trading multi-month high premiums for EUR puts over calls (downside strikes).
For more click on FXBUZ