FX Options Insights
A weaker USD, along with a stronger EUR and a slightly firmer JPY, drove the main changes impacting FX options this week. This dynamic spurred a rise in implied volatility and elevated premiums for USD puts relative to calls.
Overnight expiry implied volatility, influenced by the monthly U.S. jobs report on Friday, surged to its highest levels since the U.S. election. This suggests a market that remains underweight on USD puts and cautious about weak economic data potentially triggering a sharper USD decline.
Although the jobs data slightly underperformed expectations, the FX market's reaction was muted. However, the USD remains under pressure and vulnerable to further losses, which continues to support elevated implied volatility and robust premiums for USD puts.
In major currency pairings, directional trade flows have focused on position adjustments. GBP/USD has rebounded above 1.3000, while EUR/USD has climbed past 1.1000 in the near term. This week, there was notable demand for EUR call spreads and EUR calls with reverse knockout triggers. Additionally, short covering of EUR calls was evident in risk reversals, as sub-3-month expiries shifted from a EUR put premium to a EUR call premium. These premiums for topside strikes reached their highest levels since 2022 and 2020. Meanwhile, USD/JPY options reflect a bearish sentiment, with various strategies leveraging the existing 145.00 strike barriers to reduce premiums.
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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!