One-week euro/dollar implied volatility shot to 11.7% Thursday morning from 10.1%-10.6% Monday as traders bought euro puts/dollar calls. Traders said a slew of trades were executed at strikes of USD1.09 as well as a yard of options struck at USD1.0875 that traded on Wednesday. The bulk of the options were bought when spot was between USD1.10-1.15.
"The market got paid for a lot of short-dated puts," said one trader, adding that investors with long euro positions were buying puts to protect against a fall in the single currency. One trader added that every day last week at least USD500 million of euro puts traded. The short-dated risk reversal flipped in favor of euro puts because of the trades, according to one banker.
Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein in London, said technical reasons are the only way to explain the correction in euro/dollar levels because there has been no fundamental news to affect spot. "Overall the U.S. equity markets are still looking pretty bad," according to Dannesboe. He added, there is no reason for investors to be anticipating a stronger dollar. "The market is quite long euros," he said, noting that investors have been buying protection on those positions by purchasing euro puts.
EUR/USD Spot & One-Week Implied Volatility
