Implied volatility levels for options on the British pound and U.S. dollar have rocketed in the past two weeks, sending traders scurrying to meet a resurgence of demand for options. After cable's dramatic slide the week before, one-week implied volatility came off slightly but remained well above recent lows at around 8% most of last week, down from a high of 8.5% the previous Friday. In the spot market sterling also retained its strength against the dollar sticking around USD1.97.
Options buying on the pair started in earnest last week, as most players had been taken by surprise by the dramatic surge in spot and volatility at the end of the week prior. A trader at a European firm in New York explained cable is not as liquidly traded as the euro versus the dollar, so most players only had half an eye on it when it moved. There was demand for sterling call options between one and three months, with strikes above USD2.00. Three-month options with USD2.05 strikes were particularly popular. He noted, however, "There's not a lot of exotic risk entering the market," and attributed this to liquidity concerns.
Uncertainty and lack of liquidity over the Christmas and New Year holidays mean there could be another uptick in volatility, explained a trader at a U.S. house, who noted his firm has seen interest in one-week options with similar strikes above USD2.00 to cover that period.
Naomi Fink, currency strategist at BNP Paribas in New York, cautioned however that the firm sees the U.K. economy as peaking and "Sterling is going to see a bit of a mixed performance." She added, "I would be more bullish about sterling volatility than I would be about sterling at these levels."
