Split BoE is GBP volatility trigger, options on high alert
Aug 1 (Reuters) -Markets are undecided whether the Bank of England will hold, or cut rates by 25bps on Thursday, raising the potential for GBP volatility which has put the FX options market on high alert.
The FX volatility upon which FX options thrive is an unknown, yet key parameter of their premium, so dealers use implied volatility - their best guess. Disparity between implied and realised over the life of the option is a common occurrence and makes FX volatility a tradable asset. Therefore, any implied volatility increase over a key event like the BoE, is also a bellwether for the wider market to see the additional FX volatility that options traders think that event will generate.
Overnight expiry options included the BoE from Wednesday and their implied volatility is significantly higher. GBP/USD overnight implied volatility has doubled to 14.75 - a premium/break-even for a simple vanilla straddle of 80 USD pips from 40 USD pips in either direction.
Overnight EUR/GBP implied volatility has also doubled to 11.25 - its highest level in a year and a premium/break-even of 40 GBP pips from 20 GBP pips in either direction.
Whether this will be enough to shake GBP from recent ranges and a huge expiry zone is another question, but these price jumps in overnight expiry GBP related options show that option traders are clearly fearful of an initial bout of post BoE GBP volatility.
For more click on FXBUZ
GBP/USD and EUR/GBP overnight expiry FXO implied volatility https://tmsnrt.rs/3WwGFZF
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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