BUZZ-COMMENT-Can a barrage of key events justify FX option premium?
Reuters · 01/29 11:26
BUZZ-COMMENT-Can a barrage of key events justify FX option premium?

- There's a plethora of key economic data and central bank policy announcements this week, but option traders still seem reluctant to hold positions which could benefit from a related pick up in realised foreign exchange volatility.

FX volatility is an unknown yet key parameter of an option premium, so dealers use implied volatility as a substitute. Any disparity between implied and realised volatility over the life of that option therefore creates the trading opportunity.

One-week implied volatility gains were tame when expiry included Wednesday's Fed decision and aren't much higher since including Friday's U.S. -farm payrolls (NFP) data.

Potential option buyers are right to be cautious amid the recent lack of FX realised volatility. While that lack of volatility may have impacted implied volatility and reduced option premiums, they still appear rich when compared with past realised volatility and fair value measures. In other words, a repeat performance of FX realised volatility over coming sessions would fail to cover the option premiums, so the data would to increase it quite dramatically.

As well as the Fed and NFP report, the bank of England will decide on UK monetary policy on Thursday. There's also German and euro zone Q4 GDP, German jobs data and CPI, euro zone HICP inflation and unemployment for December, U.S. JOLTS job openings, consumer spending, ISM manufacturing PMI for January and University of Michigan sentiment final. From Australia there will be December retail sales and Q4 inflation. Month-end FX rebalancing flows will also be in the mix.

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