Market makers bought approximately one yard of USD0.8650 one-week euro puts/dollar calls Jan. 25 and Jan. 28, which sent implied volatility rocketing to 11% from 9.5%. Spot was trading around USD0.8630 when the options went through, according to traders.
The buying was said to be related to euro puts Deutsche Bank bought approximately three-months ago with a Feb. 1 expiry, according to European traders. One trader said market makers, who were long the options, wanted to sell them because there was little movement in spot and time decay was eating into their profits, whereas market makers who were short the position were making on the time decay but losing gamma.
Ian Stannard, foreign exchange strategist at BNP Paribas in London, thinks the euro will continue to weaken and investors will position themselves accordingly. He predicts the euro will hit USD0.8280 before the middle of the year. He attributes this to a rallying equity market in the U.S., which continued its ascent even though the Federal Reserve left the fed funds rate unchanged at 1.75% last week. However, he added that lingering fears about another Enron type fallout could dampen the growth of U.S. equity markets.
USD/EUR Spot & One-Month Implied Volatility
Source: JPMorgan
