Euro FX option surge underscores French election fears
June 17 (Reuters) -Demand and premiums for euro-related FX options have surged since the announcement of snap French election and reflect a market extremely worried about results that could undermine the stability of European politics and hurt the euro.
The FX volatility upon which FX options thrive is an unknown yet key parameter of their premium, so dealers use implied volatility as a substitute. While becoming a tradable asset, implied volatility can also be a bellwether for realised FX volatility expectations.
The benchmark one-month expiry includes the election results and its implied volatility in euro-related pairings is currently the one to watch for initial election-related volatility expectations, although all expiry dates have seen their premiums ramped higher over the last week. Since the election was announced, one-month expiry EUR/USD implied volatility has traded at 8.0 from 5.2 prior.
Risk reversals show the implied volatility premium for strikes in one direction versus the other. The benchmark EUR/USD one-month 25 delta contract was just a 0.15 premium for EUR puts versus calls before the election announcement and has surged to 1.5 since - a significant short term increase and its highest downside strike premium since October 2022.
The one-month 10 delta butterfly spread is another decent volatility fear gauge and it has surged from 0.25 to 0.55 in EUR/USD - its biggest short-term gain and highest levels since March 2023.
For more click on FXBUZ
EUR/USD 1-month expiry 10 delta butterfly spread https://tmsnrt.rs/4enJiFb
EUR/USD 1-month expiry FXO 25 delta risk reversals https://tmsnrt.rs/3VGe6tr
1-month expiry FX option implied volatility https://tmsnrt.rs/3VnGWgZ
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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