Options on the euro/Swiss franc currency pair were the focus of intense speculation last week, centered around last Thursday's 25 basis point interest-rate hike by the Swiss National Bank. In the run up to the announcement, heavy volumes of both euro calls and Swiss franc calls were bought. Traders estimated volumes were around 10 times that of a normal week. The flurry of options buying before the hike, coupled with similar speculation in the spot market, pushed implied volatility up to 5.2% on Wednesday, from 4.29% at the beginning of the previous week. The Swiss franc strengthened to CHF1.50 after the announcement of a 25 basis point rise in rates, having weakened to CHF1.52 in the run-up to the announcement.
The options market was dominated by demand in both directions for short-dated calls, said traders, with hedge funds and prop desks looking to punt on a spot move following the rates announcement. There was also interest in some more exotic trades and players bought one-week reverse knock-outs in both currencies with at the money strikes. The options market was quiet after the interest rate rise on Thursday and one-month implied volatility dropped to 4.55%.
The market had been pricing in a potential rate rise for several weeks, noted Paul Mackel, currency strategist at ABN AMRO in London. In the week leading up to the announcement, however, market opinion diverged with players taking punts in both directions, he added. "I'd expect a sharp drop in short-dated volatility now. There's not enough momentum right now to post a new spot low," said Mackel.
