FX options more concerned about NFP miss, than beat
Sept 3 (Reuters) -It should be no surprise that the premium for forward-looking FX options that would protect investors against NFP-induced FX volatility is high, but pricing and trade flows suggest that volatility could be greater in the event of an NFP miss, than beat.
Volatility is an unknown yet key parameter of an FX option premium, so dealers substitute it with implied volatility. If realised volatility equals implied volatility over the life of the option it should cover the premium.
Implied volatility for options that expire after Friday's U.S. jobs is significantly higher, as demonstrated by 1-week expiry implied volatility since last Friday. Higher implied volatility shows that the options market is prepared for a significant increase in FX realised volatility.
However, demand for related options has seen a preference to own USD put strikes, which give holders the right to sell the USD. These options would increase in value if the USD lost ground post NFP and for that scenario to materialise, the data would have to significantly miss expectations and increase the probability of larger/faster U.S. interest rate cuts.
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1w implied vol https://tmsnrt.rs/3X9kLMg
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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