Selling the FX fear premium might pay dividends
June 18 (Reuters) -FX option prices were boosted by FX volatility risk premiums attached to the impending French elections and are looking rather enticing from a short volatility perspective.
High FX realised volatility, or expectations of an increase, can drive implied volatility higher. Implied volatility is a substitute for that unknown quantity of FX realised volatility when pricing an option, and in the case of regular vanilla options, higher implied volatility increases the premium. FX options can therefore be monetized by buying and selling contracts as their implied volatility and/or realised volatility expectations change.
The uncertainty and threat to the EUR from the French elections has driven implied volatility and vanilla option costs significantly higher, especially those that allow holders to sell EUR. But actual/realised volatility will have to increase significantly to outperform current implied levels.
The benchmark 1-month expiry EUR/USD implied volatility has gained 3.0 in the past week to 8.0 - a significant short term increase. Historic volatility is past realised volatility and often used as a fair-value gauge. One-month EUR/USD historic volatility has risen to 5.85 - significantly lagging implied volatility.
Those who think FX can maintain familiar ranges and not over-react to the eventual French election results could benefit from short volatility strategies in related currency pairs.
For more click on FXBUZ
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)
</body></html>Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
