FX Options Insights 21/7/25
FX options entered the Japanese Upper House election on Sunday with a focus on long volatility and topside protection. Consequently, it was anticipated that risk premiums would decline once the predicted election results failed to generate realized volatility or additional weakness in the Japanese Yen (JPY).
The implied volatility for USD/JPY, specifically for the 1-week and 1-month periods, has completely reversed last week's increases. Meanwhile, the risk reversals have rebounded, with the 1-month 25-delta JPY call premium recovering to 1.0. This is a significant improvement from the long-term lows of 0.6, indicating a renewed interest in upward movements of the Yen.
At least one financial institution maintains a bullish 12-month forecast for USD/JPY at 140.00, suggesting that a price of 145.00 is also within reach in the next three months. Expectations of future market conditions may support this optimistic outlook.
Broader implied volatility across the market is under significant pressure, a situation that reflects both a lack of realised movements and expectations surrounding spot currency fluctuations. Nevertheless, the volatility levels still carry a notable premium over historical averages, which can be attributed to ongoing risks tied to U.S. political dynamics and uncertainty surrounding tariffs.
In the AUD/USD pair, there appears to be minimal market positioning in anticipation of the Reserve Bank of Australia's decision on August 12. The options markets are mirroring a low-volatility and range-bound view, indicating traders are not expecting large fluctuations in this currency pair.
The GBP calls against both USD and EUR have garnered considerable attention recently. A UK bank has pointed out the potential value in these positions, particularly in light of expectations for a hawkish stance from the Bank of England during its upcoming announcement on August 7.
Meanwhile, the risk reversals for EUR/USD have displayed a more balanced approach in terms of directional risk premium recently, with a slight advantage in premium favouring topside over downside strikes. In the context of this market behaviour, short-volatility strategies, such as double-no-touch (DNT) options, suggest that market participants expect the currency pair to maintain a range between 1.15 and 1.20 in the near term.
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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!