Implied volatility on one-week U.S. dollar/yen options rocketed last week in the run-up to the G7 meeting Feb. 4-5. Choppy moves in the spot market saw the dollar fall to JPY102.895 on Wednesday from JPY104.085 on Tuesday. On the back of that, one-week implied volatility jumped to 9.9% last Wednesday, up from 9.2% on Monday, and traders were expecting implied volatility on one-week options to spike up further on Friday, as buyers tapped one-week plays to cover the start of the G7 meeting.
"People have been playing the calendar," said a trader at a U.S. house. One-week and two-week options to cover the dates were over-bid, sending implied volatility up as the important dates approached. Players were punting on dollar/yen volatility climbing further during the G7 meeting, but were not looking for directional plays, noted the trader. One-week strangles were popular, with strikes at JPY102 and JPY105, he added. "People prefer strangles to straddles, because it gives a position for a wider range of spot move," explained the trader.
Shahab Jalinoos, currency analyst at ABN AMRO in London, explained the event risk surrounding the G7 meeting was driving real money players out of the market, causing the dollar yen pair to be pushed around by short-term speculative flows. "We think volatility is too high, however," he added, "G7 could be a damp squib for the market."
