EUR / USD FX options saw a big shift in sentiment last week – and how this forward-looking derivative reacts may offer clues on where EUR / USD goes next.
FX options thrive on volatility and directional moves, which had been lacking for most of 2021, taking option premiums (implied volatility) to pandemic lows, and erasing what little additional premium there was for EUR calls over puts (topside over downside strikes) last week .
Even before Friday’s huge NFP miss, EUR / USD bulls were coming back via the FX options market, with the subsequent post-data USD weakness rewarding volatility players and those holding EUR call / USD put options.
Benchmark one-month expiry implied volatility is now 1.0 above late April pandemic lows of 5.15, while one-month risk reversals are trading at their highest since early January, at 0.275 EUR calls over puts, from flat last Wednesday.
However, such low premiums were ripe for picking and buyers were lucky with Friday’s data miss. Without actual volatility and / or more EUR / USD gains, the risk versus reward of holding options isn’t so good now, thus any premium setbacks might warn of a falling conviction that EUR / USD gains can extend much further near term.
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Source: https://wintrademarkets.com
