FX Options Insights
Implied volatility acts as a proxy for actual or realized FX volatility, a crucial yet unpredictable factor in determining FX option premiums. Despite low realized volatility and waning trader confidence, implied volatility has remained above recent and projected 2025 lows. This resilience underscores the lingering fear and uncertainty within the FX market.
The EUR/USD pair illustrates this dynamic. While the spot market experiences minimal movement due to the hedging of significant option expirations, implied volatility is showing a slight upward trend. Risk reversals reveal a premium on downside strikes, highlighting the perception of increased vulnerability in that direction.
In the USD/JPY options market, demand for JPY call options surged after the pair breached the 150.00 level. This has pushed implied volatility and downside-over-upside strike premiums to new 2025 highs in terms of risk reversals. While standard downside vanilla options have become expensive, better value can be found in strategies such as spreading JPY calls or incorporating knock-out triggers below the strike price.
Meanwhile, USD/CAD implied volatility and CAD put premiums on risk reversals are outpacing any gains in the spot market, reflecting heightened concerns over impending U.S. trade tariffs. Similarly, implied volatility for GBP/USD and AUD/USD remain above both recent and longer-term lows, even as their spot market volatility remains subdued.
Additionally, month-end FX hedge rebalancing flows are now underway and reportedly favoring the USD. This suggests potential USD weakness as we move into the coming week.
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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!