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FX Options Insights 28/7/25
Implied volatility serves as a crucial indicator in FX options for gauging future realised volatility. Currently, it is trading close to its lowest levels since the announcement of U.S. reciprocal tariffs on April 2. With this key element affecting premium pricing now extremely subdued, it raises an important question: are volatility levels too inexpensive to overlook? For traders and investors who are using options to obtain forecasts regarding the FX market outlook, the prevailing message is unequivocal: the acknowledgement of low realised volatility is characteristic of the typical summer lull. Factors such as the resolution of Japan's election-related risks and the finalisation of several trade agreements with the United States are bolstering risk appetite and contributing to a less volatile FX environment. Nevertheless, as the U.S. Federal Reserve approaches a pivotal policy decision scheduled for Wednesday, followed by monthly job data set to release on Friday, we are witnessing a slight increase in implied volatility related to these anticipated events. This uptick indicates a recognition of potential market-moving risks, yet the pricing of this volatility remains significantly below levels one might consider high.
On Monday, the U.S. dollar (USD) experienced a modest increase but continues to trade within observed recent ranges, which has not significantly contributed to a rise in broader implied volatility. Consequently, many traders are maintaining short volatility strategies. The implied volatility for EUR/USD with a one-month expiry is currently testing the May 13 low at 7.0, marking the lowest point since late March. However, in comparison to the one-month past daily realised (historic) volatility, which stands at 5.35 and is typically referenced as a fair value metric, the current implied volatility remains relatively high. Furthermore, EUR/USD risk reversals demonstrated a slight easing on Monday but still retain a topside strike premium, indicating an expectation of potential upward movements. Traders who are anticipating further strength in the USD or simply a rebound in FX volatility may find that present implied volatility levels offer a strategic opportunity to lock in relatively low premium costs, which could increase should volatility see a resurgence
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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!