Long EUR/USD Vega reaps huge rewards since US election
Dec 19 (Reuters) -There's a particular option trade that has rewarded EUR/USD traders since the U.S. election and it's known as long Vega.
In options trading, volatility is a key yet unknown parameter of an option premium, so implied volatility is used as a substitute. Vega is one of the option Greeks and is like a volatility sensitivity metre, whereby higher Vega means the option is more sensitive to changes in implied volatility. Vega is typically higher in options with longer-dated maturities, such as 1-year.
Since the U.S. election, 1-year expiry EUR/USD implied volatility has been trending steadily and quite significantly higher. It was 6.5 on Nov. 5 and reached 7.9 in the wake of Wednesday's hawkish U.S. Federal Reserve policy announcement - its highest level since October 2023.
If a trader had bought 1-year expiry EUR/USD delta neutral straddles on a typical 30 million euros when implied volatility was 6.5, they would have made around 328,000 euros so far.
There has been no rush to take profit on long Vega trades for two key reasons: Donald Trump's presidency is expected to maintain market uncertainty and generate more volatility potential, and the rate divergence between the U.S. and EU is expected to maintain pressure on EUR/USD through early 2025.
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EUR/USD FXO 1-3-12-month expiry implied volatility https://tmsnrt.rs/4fpzdqr
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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