A large buyer of long-dated euro/U.S. dollar volatility kicked the pair's implied volatility upward last Monday. Traders said the buyer went for a large chunk of one-year call option contracts with strikes at EUR1.20. Spot was trading at EUR1.23 last Thursday and one-year implied volatility picked up in response to the trade, jumping to 9.13% at the end of Monday, from 9.09% the previous day.
"People are looking at the cyclical nature of implied volatility," said one trader, who explained volatility usually trends up into September as options trading activity picks up after the summer. Another trader at a European house said he had been looking to do a similar trade later in the week, to pay less time decay, but after Monday's buyer, long-dated vols popped up, making the trade more expensive for everyone. "Everyone's in the same position: short back dates and long the front end," he noted, adding, "The expectation is that this will be the low in volatility and people will start coming in to buy a little bit now."
Today's bank holiday in the U.K. and Labor Day in the U.S. next Monday also triggered selling of EUR/USD options over those dates. Traders said most options were sold with at-the-money strikes, but low liquidity in the market as a result of both traders and money managers being on holiday meant selling was not aggressive.