Options show FX risk shifting from election to presidency
Nov 6 (Reuters) -Ahead of the U.S. election, forward-looking FX options were bracing for heightened FX volatility, reflected in elevated risk premiums. However, post-election, these premiums have swiftly shifted to focus on the early months of a Donald Trump presidency after the Republican candidate declared victory.
Gamma demand drove shorter-dated expiry implied volatility to long-term highs in the lead-up to the election, as close polling indicated a potentially prolonged process and increased FX volatility. However, Trump's early lead quickly alleviated some of these concerns, resulting in a rapid reduction in option premiums.
For instance, EUR/USD 1-week expiry implied volatility surged to a 2024 high of 14.0%, only to retreat to 9.0%. Similarly, the 1-month expiry implied volatility dropped from its own 2024 high of 9.0% to 7.0% on Wednesday.
FX option traders now appear to be reallocating their volatility risk premiums to cover the initial months of the new presidency, from late January through April, particularly in Asian FX markets. This period is expected to coincide with potential trade policy actions by Trump, with China identified as a prominent target. Dealers report a marked increase in demand for options in this timeframe, aiming to hedge against the risk of intensified FX volatility.
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1-month expiry FXO implied volatility https://tmsnrt.rs/4eivAlP
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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