After months of heavy selling, FX option implied volatility is trading at multi year lows across all currency pairs and expiry dates, so it's prob
After months of heavy selling, FX option implied volatility is trading at multi year lows across all currency pairs and expiry dates, so it’s probably no surprise to see a rapid recovery as risk aversion/USD demand sweeps across the market.
That risk aversion appears to have started in USD/CNH in Asia Friday amid a sharp spike to new 2024 highs. The benchmark 1-month expiry USD/CNH implied volatility had been trading its lowest levels since 2017 around 2.45 Thursday, but was quickly paid to 4.5 in good size – a very significant and rapid move.
Contagion worries quickly spread through Asian and G10 FX, with more demand noted through early London. EUR/USD is one of the most liquid and highly traded currency pairs for FX and options – its benchmark 1-month expiry implied volatility is now almost 1.0 above Thursday’s multi year low of 4.9. Even the 1-year expiry, which is less affected by small bouts of spot volatility, has seen a significant increase in very large amounts from 6.1 to 6.425 so far.
There is clearly a view that, if more short positions are forced to cover, implied volatility has more upside potential. However, the fundamental FX picture hasn’t really changed, so these rapid USD gains, and subsequent implied volatility gains, could present a fresh opportunity to initiate short volatility positions.
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