Emerging market option trading outstripped volumes traded on G7 currencies last week after a jump in volatility across central European currencies raised player interest. The activity was boosted by the prolonged low volatility environment, and therefore less attractive speculative trading opportunities, across the major currency crosses.
In addition, the Icelandic krona has held its spot on the options radar since it fell 10% in 36 hours last month and was downgraded by Fitch Ratings (DW, 2/27). The krona is often bundled in with emerging market moves because it is dealt by the same traders.
Adrian Hughes, currency strategist at HSBC in London, attributed the rise in volatility to the market doing a u-turn on emerging market risk taking. "There was a large plunge in risk appetite and a change to risk aversion, causing positions to be liquidated," he noted.
In line with the shift, traders said one-month implied volatility skipped up on euro/krona, which rose to 20.7% on Monday from 16.2% the week before and the euro/Hungarian forint, which rose up to 7.8% from 7.5% over the same period. In spot, the euro gained ground on the krona to ISK85.32 on Monday from ISK79.71 the week before and also appreciated steadily against the forint to around HUF261 from HUF254 the week before.
Another traded noted activity in U.S. dollar/Turkey new lira options with players snapping up new lira puts. He said the options with one-month expires were most common with strikes around TRY140. On Thursday spot was trading around TRY133.
"There is starting to be wider views on emerging markets than a few months ago," said one official, who also noted options trading on crosses such as euro/Brazilian real and dollar/real. "A few months ago people weren't separating the good from the bad countries, everything was good because the yield was ok," he said.