FX Options Insights 28/04/25
This week's U.S. economic indicators, including Michigan consumer sentiment, GDP figures, and April's job report due on Friday, will be closely watched for signs of tariffs' impact on the economy. Since Donald Trump suggested reducing tariffs on China and reassured markets by stating he wouldn't replace the Federal Reserve Chair, FX option implied volatility has decreased, leading to calmer market conditions and supporting the USD.
Short-term implied volatility fluctuations have exceeded their realised counterparts, indicating potential opportunities for those looking to hedge against any volatility from this week's data. The BoJ policy announcement on Thursday influences JPY options, which currently display a low risk premium and strong demand.
Despite the overall decrease in implied volatility, it remains significantly higher than before the April 2 tariff announcements, underscoring ongoing uncertainty and potential volatility risks in FX markets. The demand for USD puts and JPY calls suggests increased concerns about future risk aversion that could benefit JPY and negatively impact USD.
While this week's data might not show a substantial effect from tariffs, future releases in May and particularly June are likely to attract more risk premiums due to their increased impact on upcoming Fed and broader central bank monetary policies, indicating that option volatility risk premiums might be more effectively allocated to 2-3-month expiries.
FX option users are leveraging a high topside strike risk premium to lower costs for strategies benefiting from a potential EUR/USD rally. Currently, EUR/USD is consolidating at 1.1572, its highest since November 2021, with traders anticipating a move toward 1.2000 and beyond. A reverse knock out (RKO) option offers a cost-effective alternative to vanilla options by incorporating an additional volatility risk premium. This option includes a knock-out trigger above the strike, nullifying the option if the spot rate touches the trigger before expiry. For instance, with EUR/USD at 1.1350, 3-month implied volatility at 8.9, and a 0.95 vol premium for EUR calls over puts, a 3-month EUR call/USD put at a 1.1500 strike requires a 167 USD pip premium, breaking even at 1.1667. However, adding a 1.2000 RKO trigger reduces the cost to 35 USD pips, and a 1.1900 trigger to just 19 USD pips, ideal for those expecting EUR/USD gains to remain below their trigger before expiry. Adjusting expiry dates, strike prices, and trigger levels can further influence the premium.
Barclays is the first to unveil its preliminary model forecasts for month-end FX flow. The model anticipates a robust demand for USD across all leading currencies. This comes in the wake of the 2nd April liberation day, which caused a global risk-off sentiment and a decline in stock markets. Conventional safe havens, such as US Treasuries and the USD, experienced significant declines as well. This situation resulted in an unexpected expansion of U.S. swap spreads and a spike in credit spreads. The trade-weighted USD dropped by 4.6% in April, prompting a rebalancing that drove USD demand. Credit Agricole’s FX Month-End model signals real money USD buying versus corporate GBP selling and EUR buying
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
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!