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Derivatives

Prop Desks Lead Euro/Dollar Option Flurry

European proprietary desks were snapping up short-dated euro/dollar puts and calls last week taking directional positions on the single currency.

European proprietary desks were snapping up short-dated euro/dollar puts and calls last week taking directional positions on the single currency. Desks were selling euro calls and buying euro puts in large sizes. "They are coming into the market to build their positions and take trend positions," said one trader at a European firm.

Players were buying one-, two- and three-month puts with strikes around USD1.25, dealers said. Euro calls with the same maturity were also being sold, typically striking around USD1.16. The single currency was trading around USD1.21 spot on Thursday and one-month implied volatility for the cross was hovering around 9%.

Monica Fan, global head of fx strategy at RBC Capital Markets in London, said she expects volatility to hold at this level and spot to move up to USD1.23 within the month. "We are bullish on euro/dollar," she said. "In the short term there is certain downside risk because the Federal Reserve could surprise the market with an aggressive interest rate move."

In addition, one trader said a large number of euro calls with USD1.22 strikes were set to expire on Friday, as DW went to press. "There is a couple of yards involved and nearly the whole market is involved in the play," he said. He added players were closely tracking euro/dollar moves to see if the options expire in-the-money.

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