Players were snapping up short-dated upside and downside euro puts this week after the single currency experienced dramatic swings in value against the U.S. dollar. The pair moved 150 basis points Wednesday alone, to USD1.2762 from USD1.2845 when trading opened, then USD1.2892 at lunchtime and back to 1.2730 in the afternoon. One-week euro/dollar implied volatility was around 10% on Thursday.
"This volatility is a flow on from emerging-market currencies shedding value and a tumble in gold prices," said one trader. Others noted both investors and dealers long the single currency have been protecting positions by buying one-week and two-week euro puts with strikes around USD1.26 and USD1.27. Similarly, there was buying at upside strikes of USD1.30 to protect against sharp euro appreciation. "People want to benefit from any movement in spot up or down," said one European trader. Another trader said notional being traded was sizeable, with some tickets around USD600 million.
With front-end volatility so well bid, traders noted any euro/dollar options out to one month were expensive. "You can't get gamma cheap," said one trader. He added however that because the market is "choppy and directionless" it was a worthwhile trade.
Adam Myers, a currency strategist at UBS in London, said euro/dollar volatility is expected to rise further, driven initially by U.S. personal consumption expenditure deflation data which was due to be released as DW went to press. "This is the Fed's measure of inflation and it is expected to tick up, meaning they will have to tighten rates," Myers said.
