FX Options Insight
Significant fluctuations in USD/TWD and related FX option rates have caused a ripple effect on local currencies and may even bolster support for G10 FX options. The one-month USD/TWD implied volatility has skyrocketed to record levels above 14.0 since Friday, while the one-month 25 delta risk reversals are showing increased premiums for downside strikes over upside strikes, reaching record highs of 2.5. Bid-ask spreads remain wide, highlighting liquidity concerns.
On Monday, USD/CNH hit new lows not seen since November, dropping below 7.200, and its one-month implied volatility hit 5.8 but has slightly decreased as of Tuesday's FX recovery above 7.2000. Meanwhile, USD/JPY is back around the 142.00 level after its attempt to regain 145.00 last week fell short, prompting an increase in implied volatility - rising from 11.8 to 12.8 for one month, with one-month 25 delta risk reversals shifting to 2.1 from 1.8 in favor of JPY calls over puts. Trade activities indicate persistent demand for downside strikes, particularly near 135.00.
Options for AUD/USD have seen increased buying of topside strikes over the past week, with strikes reaching as high as 0.6700 and expirations under three months. Similar to many other pairings, implied volatility has reduced from its early April and long-term peaks, yet remains robust well above levels seen prior to the April 2 U.S. reciprocal tariff announcement.
EUR/USD continues to find strong support above the mid-to-high 1.12s, firmly situated within a significant options strike expiry zone. The most substantial expirations are located between 1.1200 and 1.1400, set to expire after this week's U.S. Federal Reserve policy announcement. Implied volatility shows support, with one month sitting in the mid-9s and one year exceeding 8.0, while risk reversals and trade flows suggest a strong premium and confidence in EUR gains compared to losses.
FX options aren't the sole measure of fear to exhibit elevated levels in acknowledgement of ongoing economic risks, as rates and stock indices remain high as well.
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!