There are likely to be large USD/JPY FX option barriers at 113.00 - a level not traded since December 2018, and with existing vanilla option strikes above that level looking extremely light, conditions are ripe for increased volatility and further gains if it breaks.
A lack of soon-to-expire FX options above 113.00 suggests the USD/JPY options market maybe short gamma, meaning the likelihood of increased hedging activity and short covering above.
Barrier options will typically create short gamma when broken, too, which can add fuel to the fire.
DTCC traded option data shows around $20-billion FX option strikes between 112.00-113.00 expiring through the end of November, but just a fraction of that, above.
Implied volatility will typically gain as traders cover short gamma risk, with more upside potential should actual volatility pick up, too.
Implied volatility was already gaining last week, with the benchmark 1-month expiry reaching 6.3 Monday - highs last seen in April, from 5.0 in late September.
Shorter dated expiry JPY puts/USD calls can benefit from increased volatility and spot gains, and such options, with strikes at 113.00 and above, are in strong demand Monday.
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