Should EUR/USD bulls be worried by option signals?

<html xmlns=""><head><title>BUZZ-COMMENT-Should EUR/USD bulls be worried by option signals?</title></head><body>

Jan 27 (Reuters) -EUR/USD bulls watching price action in FX options might be worried by the shift in premiums and growing demand for downside strike options, but do the signals mean EUR/USD is primed for a setback?

Implied volatility gauges actual volatility expectations and the benchmark 1-month expiry has recovered 8.7 from 8.45. One-month expiry risk reversals show the implied volatility premium EUR put vs EUR call (downside versus upside EUR/USD strikes) has recovered 0.6 from 1-year lows at 0.3. There's also increased demand for EUR put/USD call option strikes in good amounts.

The price action is obviously concerning for EUR/USD bulls, especially with some cash FX traders reportedly reducing longs. However, while those buying downside strike options would certainly benefit from a EUR/USD setback, it doesn't mean it's inevitable. Market-makers may have become short of downside strikes and are covering those positions - just in case.

EUR/USD has almost recovered 50% of its 2021-2022 drop to 0.9528, while early January option flows show demand for EUR call options with topside triggers that will add to headwinds. There's a big volatility risk premium for ECB and Fed options next week, and month end flows can also distort price action ahead, so this would certainly seem like a prime time to reduce cash longs and to not rule out a EUR/USD setback.

For more click on FXBUZ

EUR/USD 1-week and 1-month expiry option implied volatility

EUR/USD 1-month expiry 25 delta risk reversals

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


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