Implied volatility on one-week euro/U.S. dollar options popped to around 9.25% Wednesday from 8.5% after Morgan Stanley and Goldman Sachs were seen piling into the euro/dollar options market. Dealers in New York said both firms were active buying a combined total of around USD1 billion of euro puts/dollar calls struck at USD0.90 in an extraordinary three-hour feeding frenzy. Spot was at USD0.91 when the trades were executed. Traders at Morgan Stanley and Goldman referred calls to their respective press offices. Melissa Stonberg, a spokeswoman at Morgan Stanley, and Bruce Corwin, a spokesman at Goldman, declined to comment.
Traders and strategists were left scratching their heads trying to explain the activity, which accounted for the typical daily average total volume in just three hours. Bob Gay, global head of fixed-income research at Commerzbank Securities in New York, said the two firms might have been jointly acting on behalf of a corporate client looking to repatriate proceeds from a European asset sale. One dealer suggested the trade was a reaction to heavy euro call buying the week before (DW, 5/6) and Wednesday's stock market rally which sent the greenback soaring.
"That's a pretty big move in volatility for just a few hours," said an options trader in New York. Vol had drifted higher to 9.95% as DW was going to press Friday.
