FX Options Insights 08/04/25
Volatility in the FX market has eased as risk experiences a slight rebound, allowing option implied volatility to decrease from its recent and long-term highs across most currency pairs. Nonetheless, despite these developments, implied volatility continues to be significantly higher than levels observed prior to the tariff announcement, indicating a market still cautious of further unfavorable currency fluctuations.
After some initial declines following the tariff news, the USD has gained momentum this week as safe-haven appeal outweighed concerns about U.S. stagflation. This recovery is particularly observable in EUR/USD option risk reversals, where the premium for topside volatility over downside volatility surged to its highest point since 2020 post-announcement but has since normalized to a neutral position, showing no premium in either direction.
Currencies closely linked to risk such as AUD/USD have also experienced a decline in implied volatilities. After achieving the largest increases among G10 FX counterparts, the benchmark 1-month expiry AUD/USD implied volatility has decreased to 15.0 from 17.0, although it was at 8.5 before the tariff announcement. Its downside strike risk reversal premiums have been more hesitant in relinquishing recent gains.
Furthermore, USD/CNH has also seen a reduction in its implied volatility from Monday's peaks, but at 6.7 compared to 7.5, the 1-month expiry remains relatively high when contrasted with last week's lows of 4.6. Risk reversals maintain a strong premium for the topside over downside strikes for USD/CNH.
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!