The price of one-month euro/dollar options spiked to 10.4% Wednesday, 0.6% higher than two days previously and up from 9.6% where it sat the previous week. The hike came on the back of a dramatic appreciation in the euro, which saw the dollar dive to USD1.10 against the single European currency, down from USD1.08 the week before. The sudden move caught the market slightly off guard as euro/dollar was trading in a tight range during February, the trader noted.
Risk reversals on the currency pair were skewed to the upside, with short dated trades dominating due to traders' expectations of the strike against Iraq in the next fortnight, according to a trader. With the dollar forecast to continue its decline against the euro, vol is expected to follow and if the euro strengthens by two cents over the next two weeks, vol will likely leap as high as 11%, he predicted.
Jim Kamphoefner, foreign exchange options strategist at Bank of America in San Francisco, noted that much of the volatility hike can be attributed to barrier options being knocked out as the euro moved through USD1.09 and USD1.10. The expiry of these options has provoked a need by dealers to buy back vol and gamma, with many purchasing back out-of-the-money euro calls/dollar puts, he noted. Subject to movements in Iraq, the dollar is likely to continue its decline, which in turn may lead volatility to move higher.
EUR/USD Spot & One-Month Implied Volatility
