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FX options wrap - Fear premium, intervention shun, GBP downside

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European politics were the main driving force behind FX option markets over the last week, with EUR related pairings leading the way since the French snap election announcement.

EUR related implied volatility and its downside strike premiums reach new long term highs, but that election fear premium takes it well above historic volatility and might appear enticing from a short volatility perspective.

EUR/USD 1-month expiry implied volatility from 5.15 to 8.0 in a week, leaving 1-month historic/realised volatility at 5.85. EUR/CHF 1-month implied volatility from 5.0 to 7.65 and EUR/GBP 1-month from 3.8 to 6.0. EUR/USD risk reversals reached 1.5 EUR puts over calls, with butterfly spreads higher, too.

EUR/USD dealers report a massive 2-billion euros trading via 3-month expiry 1.0200 EUR puts at 9.0 and 9.1.

Benchmark 1-month expiry USD/JPY implied volatility traded new lows since April at 8.0. JPY call over put implied volatility premiums on 1-month expiry risk reversals are just 1.1 vs 1.75 before the initial bout of official intervention on April 29 - suggesting a lower risk of a repetition. Trade flows show 160.00 is back in contention.

Political spillover fears have doubled the implied volatility premium for GBP/USD downside strikes to 0.85 on 1-month risk reversals. One-month implied volatility recently increased from 6.0 to 7.0 , but was looking rich versus historic volatility and traded 6.7 on Tuesday.

For more click on FXBUZ

GBP/USD 1-month expiry 25 delta risk reversals https://tmsnrt.rs/4csuJOH

1-month expiry FXO implied volatility https://tmsnrt.rs/3KTi3og

EUR/USD 1-month expiry implied vs 1-month daily historic volatility https://tmsnrt.rs/3zaQBjC

(Richard Pace is a Reuters market analyst. The views expressed are his own)


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