There's potential value in USD/JPY FX options
June 6 (Reuters) -FX volatility traders looking for potential value might consider USD/JPY options, where FX realised volatility has increased.
FX volatility is an unknown but key parameter of an FX option premium so dealers use implied volatility as a substitute. That creates an opportunity to trade any disparity between implied and realised volatility.
Historic volatility is past realised volatility and can provide a fair value measure for implieds. Historic volatility is recovering from recent setback lows as realised volatility picks up and is currently above implied volatility on some of the benchmark dates to highlight the potential value in long volatility positions.
One-week expiry implied volatility has increased from 8.8 to 9.8 since including the June 12 U.S. CPI data and U.S. Fed policy announcement, highlighting the potential for those events to increase USD/JPY realised volatility. However, 1-week daily historic volatility has also been increasing to reflect the recent pick up in daily realised volatility and is currently 11.3. This shows that a repeat performance of the past week's USD/JPY realised volatility would reward those holding 1-week implied volatility.
Benchmark 1-month expiry USD/JPY implied volatility increased from 8.5 to 9.4 as USD/JPY fell on June 4 and has since slipped back to 8.8. One-month historic volatility has risen to 8.5 and highlights fair value potential on any further implied reversion.
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USD/JPY 1-month expiry FXO implied vs historic volatility https://tmsnrt.rs/4aRVnzm
1-week expiry USD/JPY implied vs 1-week historic volatility https://tmsnrt.rs/3VsKSOK
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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