One-month euro/U.S. dollar implied volatility rose to 10.55% last Wednesday from 10.05% a week earlier, as demand for euro calls/dollar puts picked up as bulge bracket firms adjusted their positions before the holiday season. Investment banks were the most active in the market, buying up one-week euro calls/dollar puts as the one-month 25-delta risk reversal moved further in favor of dollar puts, according to New York-based traders. Most of the options were at-the-money and had strikes around USD0.89.
Traders said firms wanted to keep short-dated risk low to avoid time decay over the holidays. "You don't want to get stuck with one of these during the Christmas week. Volume is going to be extremely low," the trader added. Customers are tying to give us a position over Christmas, but we're holding off on making any major decisions," said one trader. Another trader added that firms' desire to keep their short-dated risk as low as possible led to customer flow business decreasing. Typical sizes on the trades ranged from USD10-20 million.
Paul Podolosky, a currency strategist at FleetBoston Financial, predicted a continued slowdown in the U.S. market as players look to tidy up their books before the lull sets in during the holiday. "Nobody wants to get caught holding too much risk come Christmas," another trader added.