BUZZ-COMMENT-A good time to hedge EUR/USD with FX options

Feb 19 (Reuters) - The FX volatility and directional risk that determines the price of FX options has fallen to 2025 lows in the majority of the leading currency pairs. However, EUR/USD options have met mild demand which suggests they may struggle to fall much further.

There are still simmering risks that could influence EUR/USD volatility and direction. Although the market has become rather numb to related headlines, the threat of U.S tariffs has not gone away. A potential Ukraine peace deal, which has lent support to EUR/USD, is only in its early stages. Also, the impending German elections could prompt some EUR sales if the far right party do better than expected.

Volatility is a key but unknown component of an FX option premium, so dealers use implied volatility as a substitute. If FX realised volatility outperforms implied volatility over the life of the option, it will return a profit, which is more likely with implied volatility now so low.

The implied volatility premium for USD calls over puts as measured by risk reversals has also fallen to 2025 lows, which has further reduced the cost of options that would protect against EUR/USD losses.

For more click on FXBUZ