March 4 (Reuters) - Given their forward-looking nature and reliance on FX volatility, price action and trade flow in FX options can offer insights into the perceived outlook and potential targets for a currency pair.

That was evident in USD/JPY options before 150.00 was breached on February 20. Option traders had been buying sub-150.00 JPY call strikes which would increase in value and return profits if 150.00 were breached before expiry - which it was.

Renewed demand for sub-150.00 strikes emerged after USD/JPY rebounded to 151.00 late last week, signalling expectations for new JPY demand to push USD/JPY back below 150.00 — which has since happened.

The most recent USD/JPY options price action shows sub 1-month expiry implied volatility reaching new 2025 highs. Implied volatility gauges actual/realised volatility expectations and shorter-dated expiries are the key beneficiaries, so although it remains elevated, dealers are expecting more of the same.

There has also been demand for 147.00 and 146.00 strikes that would benefit from more volatility and USD/JPY losses. However, some JPY call options include knock-out triggers, with 145.00 emerging as a key level. If these triggers are hit before expiry, the options become void. This suggests that traders employing knock-outs may see 145.00 as an unlikely target — at least in the short term.
USD/JPY option implied volatility


USD/JPY risk reversals

(Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)