FX Options Insights
FX hedging possibilities have become increasingly appealing as the overall implied volatility of FX options has decreased from the significant increase seen after the U.S. tariff announcement on April 2, which had temporarily driven volatility to historically high levels. This subsequent decline has reduced hedging expenses, sparking renewed interest from market players.
Although the larger trade tariff issue remains unresolved, temporary 90-day reprieves — with global trade partners until July 8 and an extension with China to August 10 — have helped to stabilise the situation. With volatility easing, the U.S. dollar has bounced back from its previous lows against various major currencies, contributing to a reduction in overall implied volatility.
Lower premium rates mean that less realised volatility is required to cover option costs and yield returns, making FX options a more attractive hedging instrument. In particular, premiums for USD puts (which grant the option to sell the dollar) have remained strong, highlighting the market's uncertainty regarding the future direction of the USD.
The USD/JPY pair shows a strong correlation with risk and general USD trends, positioning it as a crucial indicator for FX option activity. It is not surprising that USD/JPY options responded sharply to renewed concerns regarding Asian FX triggered by Wednesday's news about U.S.–South Korea trade and FX discussions.
Despite a general increase in implied volatility on Wednesday, the USD/JPY pair maintained its gains on Thursday, as the benchmark 1-month USD/JPY implied volatility surged from a low of 9.5% following the trade reprieve to 11.3%. Risk reversal options are currently experiencing a renewed demand for USD/JPY downside protection, especially with the 3-month expiry tenor— which extends past the U.S.–China tariff truce.
EUR/USD has been trading around 1.1200, and it’s noteworthy that over 8 billion euros in nearby option strikes are set to expire on Thursday and Friday.
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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!