FX Options Insights 19/1/26
FX options are heavily influenced by both current and anticipated FX realised volatility. Despite potential future risks, the prevailing calmness in FX markets has the most significant impact on price movements. Historically, actual or realised volatility, as measured by recent daily assessments, remains predominantly lower than the current implied volatility. This indicates that if similar patterns of FX realised volatility continue, profits are unlikely. Moreover, the low implied volatility is discouraging option sellers, who feel inadequately compensated for the risk of losses if realised volatility were to rise suddenly. Following the weekend, there was a slight recovery in implied volatility, particularly for EUR/USD, after the currency pair briefly dipped below 1.1600, suggesting potential short positions and vulnerability to downside moves. The benchmark 1-month expiry implied volatility increased from 4.9 on Friday to 5.5 on Monday, and it has since been trading around 5.4, while 4.4 represents the mid-December and 5-year low. Risk reversals are generally neutral, but there is a slight premium for topside strikes currently.
In the case of GBP/USD, the 1-month expiry implied volatility decreased from 6.3 to 5.8 last week and is at 5.95 on Monday, supported by a weaker spot market and a higher downside strike premium. The recent trend has shown some interest in sub-1.3300 strikes while reducing topside strikes above 1.3500. For AUD/USD, the 1-month implied volatility recovered from 6.6 to 8.2 since mid-December but fell back to 7.3, as AUD/USD remains within familiar volatility ranges. Trade flows demonstrate a preference for gradual appreciation in AUD/USD over time, although there is some demand for AUD puts via risk reversals, indicating a wish to hedge against any risk-averse downturn. The implied volatility for USD/JPY has been closely following the spot market, with the benchmark 1-month expiry rising from a low of 7.6 post-U.S. jobs data to 9.3 last week as the spot price surged to new heights above 159.00 since 2024. The previous week closed with a 1-month expiry at 8.3 before fluctuating between 9.0 and 8.7 on Monday. Risk reversals have shifted from a downside premium of 0.6 to 0.825 amidst the setback in the spot market. USD/JPY trading volumes are robust, with demand for volatility protection evident, focusing on the upcoming BoJ meeting and the snap elections anticipated in mid-February.
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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!