FX Options Insights
U.S. President Donald Trump's recent criticism of the Federal Reserve Chair has led to a significant decrease in the value of the U.S. dollar (USD), prompting increased interest in foreign exchange (FX) volatility protection, particularly in the form of USD put options, which allow investors to sell USD at a predetermined price if it falls. Implied volatility, a gauge of market expectations for future price fluctuations, has surged across all options, with one-week expiry options garnering significant attention. This interest is notably driven by the upcoming early release of the U.S. Non-Farm Payroll (NFP) data scheduled for next Thursday. Additionally, the two-week expiry options are gaining traction as they coincide with the impending U.S. reciprocal tariff extension deadline set for July 9, which could further impact the market.
In this volatile environment, the EUR/USD currency pair has attracted the most demand for options. It has experienced a rally, achieving new highs not seen since September 2021, and is approaching a critical Fibonacci retracement level at 1.1745. A breach of this level could pave the way for a rise to the 2021 high of 1.2349. The benchmark one-month implied volatility has rebounded to 8.7, recovering from a low of 8.1 observed on Wednesday, while the one-year implied volatility has also increased from 7.7 to 8.0. The one-month expiry 25 delta risk reversals indicate an increased demand for and premium on upside options compared to downside strikes, with EUR calls recovering to 0.625 from last week's 0.4 for EUR puts. Significant buying activity has been noted in outright EUR call strikes, particularly a one-month call option at a strike price of 1.2210, which was purchased in substantial amounts at a value of 10.0, alongside renewed interest in cost-effective EUR call risk knockout options (RKO).
Turning to the USD/JPY currency pair, the one-month implied volatility has risen to 10.5 from mid-week lows of 9.75, while the one-month risk reversals have also improved to 1.4 from 1.15, rewarding those who sought value on Wednesday. Conversely, the GBP/USD and AUD/USD pairs have seen more subdued increases in implied volatility, particularly with the AUD/USD, which has been constrained due to a series of unsuccessful attempts to build upward momentum since April. Despite indications that implied volatility may have peaked with a stall in the decline of the USD, price action suggests a prevailing sentiment geared towards the potential for further losses in the USD.
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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!