FX Options Insights 18/2/25
Current pricing in the options market reflects subdued realised volatility and improved risk sentiment. The premium for USD calls over puts across several currency pairs has narrowed, mirroring the USD's retreat from its two-year peak to recent two-month lows.
However, there has been renewed interest in implied volatility following sharp declines from last week's highs. For EUR/USD, 1-month implied volatility has dropped by over 2 points in February, sliding from 9.0 to 6.9, while the 1-year implied volatility has eased from 8.0 to 7.0. A standard 30-million-euro short straddle at these levels could yield potential profits of approximately 139,000 euros for 1 month and 234,000 euros for 1 year.
Similar patterns are evident in other currency pairs, though USD/JPY has been an outlier within the G10 currencies due to its higher realised volatility. There is notable interest in downside strike options to hedge against a potential surge in USD/JPY volatility if the critical 150.00 level is breached.
Meanwhile, AUD/USD implied volatility has hit long-term lows, supported by a hawkish rate cut from the RBA that bolstered AUD/USD's upward momentum. Gains in overnight expiry implied volatility on Tuesday suggest that the RBNZ's policy decision on Wednesday could drive greater realised volatility for NZD than what the RBA triggered for AUD or AUD/NZD earlier in the week.
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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!