FX Options Insights
FX implied volatility surged on Wednesday following a brief pause on Tuesday, driven by the implementation of U.S. trade tariffs and China’s retaliatory 84% tariffs on U.S. goods. Demand for very short-dated expiry options has spiked across all currency pairs, as they offer the highest profit potential amid heightened FX spot volatility. However, due to market uncertainty and persistent liquidity concerns, bid-ask spreads for implied volatility remain notably wide across all currency pairs.
The Japanese yen (JPY) continues to be in focus, strengthening against the U.S. dollar (USD) as it breaks through the 144.00 option barriers. This movement has pushed implied volatility higher, with 1-month expiry volatility increasing from 15.0 to 16.0. The entire 1-12 month expiry term structure has now reached its highest levels in two years. Risk reversals show a significant premium for JPY calls over puts, reaching levels last seen during the early stages of the 2020 COVID-19 pandemic.
The Australian dollar (AUD) dropped to a 5-year low of 0.5910 against the USD in Asia but rebounded to 0.6000 ahead of China’s tariff announcement. Implied volatility has recovered and stabilised at recent 2-year highs. Meanwhile, the risk reversal premium for AUD puts over calls remains at its highest level since 2020.
The euro (EUR) has regained ground, with EUR/USD climbing to 1.1095 on Wednesday after hitting a low of 1.0880 on Monday. One-month expiry implied volatility has settled at 10.8, approaching Monday’s peak of 11.25 after briefly dropping to 9.3 on Tuesday. Risk reversals have also recovered, with the 1-month premium for EUR calls over puts rising to 0.4, following a sharp decline from last week’s 5-year high of 0.9.
Emerging market currencies are under pressure, posting losses against the USD. The USD/CNH pair is trading just below Tuesday’s record high of 7.4288, with implied volatility and topside strike risk reversal premiums hitting new long-term highs. Similarly, USD/ZAR is nearing its record highs from June 2023. The surge in implied volatility and the ZAR put/USD call premium suggest further potential for USD/ZAR appreciation and increased volatility.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
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!