FX Options Insights 26/11/24
Large option expirations may push the EUR/USD exchange rate to 1.0500. The most associated cash hedging flows are drawn to FX option strikes that are about to expire. Although the purpose of these hedging flows is to offset exposure, they may also attract potential targets. Massive 1.0500 strikes are scheduled to expire in the upcoming sessions. 2.1 billion euros At 10 a.m. on Tuesday, 4.4 billion euros New York Due to the approaching Thanksgiving holiday in the US, trade flow may be dominated by strikes. On Friday, there are an additional 4 billion euros between 1.0485 and 1.0500. Trump headlines increased the implied volatility of the EUR/USD option. Tuesday As volatility risk decreases, it is presently relaxing; the 1-month is 8.3 from 8.5.
Option traders anticipate a big FX reaction, as evidenced by the substantial rise in overnight expiry NZD linked implied volatility after the Reserve Bank of New Zealand's policy statement on Wednesday. The premium/break-even for a vanilla straddle has increased from 33 to 51 USD pips in each direction due to the overnight NZD/USD implied volatility, which has risen from 13.5 to 21.0. With implied volatility rising from 6.5 to 15.75 and the break-even range expanding from 30 to 73 NZD pips in either direction, the AUD/NZD premium gains are even more noticeable. These rates are the same as those quoted during the RBNZ policy decision on October 9, when rates were cut by 50 basis points, causing the NZD/USD to plummet from 0.6141 to 0.6053. Market speculation of more aggressive easing was fuelled at the time by the RBNZ's emphasis that policy remained restrictive even if inflation had returned to target. With a 40% possibility of a 75 bps shift, interest rate markets are currently pricing in 60 bps of reduction for Wednesday. This explains why NZD-related options have a higher FX volatility risk premium.
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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!