FX Options Insight 05/09/24
The U.S. jobs report from Friday is now included in overnight expiry FX options, and the increase in associated premiums may provide hints about the anticipated FX response. FX volatility, which is a crucial but unknown component of an FX option premium, dealers employ implied volatility. Realized volatility would equal implied volatility over the option's term and cover the premium in a perfectly priced option. The option with the shortest period is overnight expiry. Consequently, any increase in implied volatility and the premium or break-even that follows a significant event would inevitably mirror the expected rise in realised volatility.
Since Friday's U.S. jobs data was included in overnight option expiry in USD-related currency pairings, its implied volatility has significantly increased to its highest levels this year prior to the NFP. This demonstrates how crucial the information is to the U.S. Federal Reserve's interest rate decision on September 18, which is now subject to a two-week expiration.
For a basic at-the-money straddle option, the overnight expiry EUR/USD implied volatility has climbed to 14.5 from 8.0, which is a premium/break-even of 67 USD pips from 37 USD pips in either direction.
Since the inclusion of the U.S. jobs data, the implied volatility for overnight expiry USD/JPY has jumped from an already high 18.0 to 31.0, representing a premium/break-even of 185 JPY pips from 105 JPY pips in either direction.
The implied volatility for the AUD/USD overnight expiry is up to 20.0 from 14.0, or 50 USD pip movement from 39 USD pip movement in either direction.
There appears to be a higher perceived risk of volatility if the USD declines amid weaker-than-expected data, as seen by related trading flows that show more interest in buying USD put options—the right to sell the USD—than USD call options—the right to purchase 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!