Central banks flash a huge blip on the FX option radar

Dec 8 (Reuters) – One week FX option expiries now capture a swathe of central bank rate decisions from the U.S, Europe, UK and Switzerland, on top of Tuesday’s US CPI data, which has further boosted related implied volatility and warns dealers of the extreme risk of increased actual volatility ahead.

Dealers use implied volatility to gauge actual volatility expectations over the life of the options. Option holders can profit if actual volatility outperforms implied, so the big jump in the latter since capturing the US CPI data and now these central bank meetings flag the additional volatility risk premium.

EUR/USD one-week implied volatility adds 3.0 to match longer term highs at 15.0 since Wednesday and 10.0 before the CPI data – a premium/break-even for a simple vanilla straddle of USD 175-pips in either direction.

USD/JPY one-week implied volatility is up 5.0 on the week to 18.0 – a premium/break-even of 272-JPY pips in either direction.

USD/CHF one-week implied volatility is 13.25 from 8.5 at the start of the week – 137 CHF pips in either direction, with EUR/CHF now 9.5 from 6.5 Wednesday (104 CHF pips either side).

GBP/USD 1-week is up 5.0 on the week to 17.0 – a break-even of USD 228-pips in either direction, while 1-week expiry EUR/GBP implied volatility has added 3.0 to 9.0 since capturing the BoE and ECB to £86-pips in either direction.

AUD/USD and NZD/USD 1-week implied volatilities gain 4.5 to 18.5 this week, which are USD 133-pips and 126-pips in either direction respectively.

(Richard Pace is a Reuters market analyst. The views expressed are his own)