Options primed for immediate Trump 2.0 FX volatility
Jan 20 (Reuters) - There has been a notable surge in FX option prices over recent sessions, particularly for shorter-dated expiries, which stand to benefit most from near-term FX volatility.
This anticipated volatility stems from the early implementation of Donald Trump's policies during his second term as U.S. president.
The FX volatility upon which FX options thrive is an unknown yet key part of their premium, so dealers use implied volatility as a substitute. If actual/realised FX volatility exceeds implied volatility over the life of the option, it can generate profit and vice versa.
Demand for sub 2-week expiry options has been strong in the run-up to Trump's Jan. 20 inauguration, with 1-week implied volatility levels in many of the main G10 FX pairings demanding their highest premiums since the November U.S. election.
USD calls have been the favoured option to own through the early days of Trump's second presidency. The implied volatility premium for USD calls over USD puts, as shown by risk reversal contracts, has climbed even higher.
USD/CAD has led the charge in recent option price gains, with its implied volatility and USD call premium hitting new 2-year highs.
For more click on FXBUZ
USD/CAD FXO implied volatility https://tmsnrt.rs/3C4JFq3
1-week expiry FXO implied volatility https://tmsnrt.rs/3EciYQB
GBP/USD FX option risk reversals https://tmsnrt.rs/40kMawp
1-month expiry USD/CAD 25 delta risk reversal https://tmsnrt.rs/4g0oUcU
(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@thomsonreuters.com))
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