FX Options Insights 14/7/25
On Monday, the implied volatility for 1-month expiry FX options opened marginally higher due to further gains in the USD, but overall demand remained limited. TThe gap between implied volatility and realised volatility is widening, which should favour short volatility trades during the traditional summer lull. For context, 1-month EUR/USD daily realised volatility is just 5.25, yet 1-month implied volatility is 7.9. This indicates that market participants are anticipating greater future volatility than has been observed in recent trading.
EUR/USD options continue to be long on topside strikes, with many ending in-the-money if the 1.2000 RKO triggers remain untouchable through July. TThis suggests that traders are betting on the euro strengthening against the dollar above the 1.2000 level. While there has been some demand for EUR/USD downside strikes, it's been fairly tame and 1-month expiry risk reversals reflect a more balanced directional bias, meaning there is not a strong conviction in either direction right now.
GBP/USD risk reversals are trading at their highest downside skew since March, underscoring market perception that sterling's vulnerability lies to the downside. This indicates that traders are increasingly concerned about a potential decline in the value of the British pound relative to the dollar.
Recent USD/JPY focus has been on the upper house elections on July 20, with heightened demand and premium for volatility protection, particularly the topside. The elections are significant and may introduce uncertainty into the market, prompting traders to seek options that protect against potential volatility. Volatility risk premiums are now evidenced by 1-week (July 21) implied volatility gains, which have consequently risen as investors seek to hedge against risks associated with the elections. RRisk reversals have experienced a decline in their downside over upside strike risk premiums, which have slipped to the lowest levels since January. This may imply that there is less apprehension about downside risk compared to earlier in the year.
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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!