Implied volatility on the euro/U.S.dollar currency pair dropped last week as market players started to sell euro options. Investors stopped punting on the upside of the euro and started selling options last Tuesday, when the euro bounced back from the USD1.30 barrier. The euro fell to USD1.2916 Wednesday from USD1.2951 at the start of the week and implied volatility fell to 9.96% last Wednesday from 10.46% on Monday.
"The rejection of the USD1.30 level made the market a bit nervous," a trader said. "There's been a big sell-off of vols," noted another trader. "I think vol has come off a bit too quickly," he added, "It's only a matter of time before we break USD1.30." The risk reversal remained weighted in favor of euro calls, which one trader said was an indication the dollar's gain against the euro was a temporary blip rather than a trend. Exotic structures proved popular, with market players selling nine- and 12-month euro calls with strikes around USD1.3250 and knockouts on the downside at USD1.2350. Another popular strategy was to sell one-month strangles at around USD1.31, he added.
Tony Norfield, currency strategist at ABN AMRO in London, noted people are beginning to question how much euro upside remains. "Everyone is long euros," he added, explaining people are beginning to wonder if there is actually some downside potential. Norfield, however, thinks the overall upward trend of the euro is set to continue.