FX Options Insights 22/7/25
Bets against the US dollar (USD) and fluctuations in foreign exchange (FX) volatility are regaining attention in the markets, as there is a noticeable increase in the demand for USD puts. This uptick in demand is occurring despite a general trend of declining implied volatility across various currency pairs.
Specifically, sub-three-month EUR/USD risk reversals have witnessed a rise, reaching a three-week peak at 0.4. This increase indicates a stronger preference among traders for upside protection, which refers to options strategies that benefit from potential rises in the currency pair, in comparison to downside coverage. However, the spot EUR/USD rate is experiencing resistance, remaining below a significant strike expiry level of 1.1700. This limitation is constraining further upward price momentum and consequently dampening the overall demand for volatility, which remains under pressure.
In the USD/JPY pair, there is a notable retreat following the recent elections. This shift has caused the one-month 25-delta risk reversal to climb to 1.1, recovering from the historically low levels near 0.6. Concurrently, there is increased demand for JPY call options, as traders look to position themselves favorably in a strengthening Japanese yen. The risk premium associated with the elections, which had built up in the preceding weeks, has seen a significant unwinding. This is evident as the one-week implied volatility has decreased from 12.5 to 8.5, while the one-month implied volatility has moderated to 9.9, down from the low 11s witnessed in the previous week.
In the GBP/USD market, the one-month implied volatility has decreased to a new six-week low of 7.25. This decline is accompanied by risk reversals that have lost some of their previous premium for GBP puts relative to calls, signaling a reduction in demand for downside hedging strategies. Meanwhile, the one-month implied volatility for AUD/USD has dropped to 9.0, marking the lowest level since the spike prompted by President Trump's tariff announcement. The drop highlights a broader trend of compression within the G10 volatility landscape.
The subdued realized volatility observed during the summer months continues to exert downward pressure on implied volatility levels. Nonetheless, with critical financial events approaching, such as the tariff deadline on August 1 and several important decisions from central banks, the current low volatility premiums may present an appealing opportunity for market participants looking to hedge against potential volatility-driven events in the FX markets.
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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!