FX Options Insights 18/12/24
Option traders are making adjustments to their positions ahead of Wednesday's Federal Reserve meeting and the Christmas holidays. Two significant trades were observed early in London on Wednesday. A trade of 1.0500 for January 7 at 1.0620 occurred with implied volatility of 8.55 versus 7.1. There was interest in selling Monday and buying January 7 with a volume of 500 million euros. Another trade involved 1.0500 for February 17 against 1.0150 for March 11, with implied volatility of 7.85 versus 8.725. There was a large interest in buying February and selling March with a volume of 1.5 billion euros. Option traders are not anticipating a significant foreign exchange reaction to the Fed's decisions. The implied volatility for overnight expiry has already decreased from 15.0 to 14.0, and for one week, it has dropped from 8.0 to 7.5. The largest FX option strike expiries for 2024 on Friday will continue to influence the market.
The implied volatility for AUD/USD with an overnight expiry has risen from 13.0 to 18.0. The premium/break-even point has grown from 24 USD pips to 47 USD pips, matching levels observed during last week's U.S. CPI data release and the RBA's policy announcement. The implied volatility for 1-12 month expiry FX options remains robust. Risk reversals indicate a greater perceived volatility risk on the downside for AUD/USD.
The implied volatility for USD/JPY with an overnight expiry has been influenced by Wednesday's U.S. Federal Reserve policy decision, making it challenging to assess the Bank of Japan (BoJ) independently. Nonetheless, it has risen significantly from 12.5 on Tuesday to 26.0 on Wednesday, indicating a premium/break-even range of 80 JPY pips to 166 JPY pips. In contrast, EUR/JPY may provide a clearer indication of the pure volatility risk premium associated with the BoJ, as its overnight expiry implied volatility has climbed from 13.5 early Tuesday to 23.0 on Wednesday, reflecting an increase in premium/break-even from 91 JPY pips to 155 JPY pips, marking its highest level since September. Options set to expire shortly after the BoJ meeting have experienced a rise in premiums for JPY calls compared to puts, which gives the holder the right to buy the JPY rather than sell it. This market behavior implies that a BoJ rate hike is still a possibility, and if it occurs, it would likely strengthen the JPY and increase JPY-related FX volatility.
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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!