Options show extent of Jackson Hole risk to USD/FX

Aug 25  – FX volatility expectations are a key consideration when determining an FX option premium, so any change to those premiums over a major event like Friday’s speech from Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium can offer clues on the perceived FX reaction.

FX volatility traders use options in conjunction with an opposing cash position, which removes the directional risk and allows them to capture actual volatility by adjusting that hedge when the FX spot moves. The aim for option holders is to capture more FX pips than the premium paid.

Overnight options expire the next working day at 10-am New York (now Monday) and consequently include Powell’s speech at 10:05 AM New York time on Friday. The premium for simple overnight expiry at-the-money straddle options in EUR/USD has increased from 42 USD pips to 54 USD pips in either direction. Overnight expiry USD/JPY premium is now 90 JPY pips from 58 JPY pips and AUD/USD now 49 USD pips from 37 USD pips in either direction.

To give those prices a little more context, before the US Fed rate decision on July 26, the overnight expiry FX volatility premium for EUR/USD was 75 USD pips, USD/JPY 110 JPY pips and AUD/USD 53 USD pips in either direction.

While traders are clearly not complacent about the Jackson Hole risk to FX volatility, they are likely to remain more focused on hard data like next week‘s NFP and ISM ahead of September‘s US policy meeting.

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