FX Options Insights
Recent developments in trade policy have significantly influenced FX options, reflecting the impact on investor confidence in the U.S. This has led to increased premiums for protecting against future FX volatility and potential USD losses.
Implied volatility has decreased from last week's peaks as risk appetite shows signs of recovery and spot markets stabilise after a period of intense volatility and USD depreciation against most of the G10 trading partners.
Despite this slight easing, implied volatility remains elevated compared to levels before the April 2 tariff announcements. The premium for USD puts over calls, as indicated by risk reversal contracts—which provide the right to sell the USD versus buying it—also remains high.
Significant profits have been realised on long EUR/USD volatility options, contributing to the reduction in implied volatility compared to last week's long-term highs. However, risk reversal premiums for EUR calls/USD puts have reached new highs since 2020, with minimal setbacks. Similar trends are observed in GBP/USD and USD/JPY, with a notable demand for USD put options across these currency pairs.
The 1.1500 level is crucial for EUR/USD, marking the high before the Ukraine conflict and containing numerous barriers and triggers from early March. Breaching this level could lead to accelerated gains. In USD/JPY, traders are purchasing options below the 140.00 strike, while the 1.3500 strike level is popular among GBP/USD option buyers.
Dealers are seeing interest in options with attached triggers, which offer benefits from USD losses but at a reduced premium.
In AUD/USD, the high downside versus topside strike premium is being unwound as the spot price returns to familiar levels.
For USD/CNH options, topside strike premiums are moving towards neutrality in the 1-month expiry, and the implied volatility term structure is easing, though it remains above recent lows.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!