USD/CHF options flag SNB induced volatility warnings
Sept 25 (Reuters) -Overnight/next day FX options now expire after Thursday's Swiss National Bank policy announcement and a substantial jump in the premium of those related to the Swiss Franc warn of a significant increase in its volatility.
FX volatility is an unknown yet key component of an FX option premium, so dealers use implied volatility as a substitute. If actual/realised volatility matches implied volatility, it should cover the option premium. Any disparity between implied and realised volatility can therefore be traded using FX options as the vehicle. The increase in implied volatility when the option maturity falls after a key event, like Thursday's SNB, consequently highlights any additional FX volatility that event is expected to generate.
Overnight expiry USD/CHF implied volatility has jumped from 9.5 to 17.5 since including the SNB - the premium/break-even for a simple vanilla straddle has almost doubled from 33 CHF pips to 62 CHF pips in either direction. That's on par with the Sept. 18 U.S. Federal Reserve policy announcement.
Overnight expiry EUR/CHF implied volatility has increased from 9.0 to 16.0 - a premium/break-even of 35 CHF pips to 63 CHF pips in either direction. These are levels last seen amid the rapid spot fall to new 9 year lows at 0.9213 in early August.
The market is split on whether the SNB will cut by 25bps or 50bps on Thursday, which is elevating the CHF related FX volatility risk/premium.
For more click on FXBUZ
Overnight expiry FXO implied volatility in CHF and EUR/CHF https://tmsnrt.rs/4gRfulN
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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