FX Options Insights

The decrease in the premium for vanilla FX options indicates a broader recovery in risk sentiments and a drop in both realised and anticipated FX volatility, enticing investors to return to the market. Even with U.S. involvement, the Iran-Israel conflict limited the recent increases in FX option implied volatility to an offered stance. It is trending back toward the lows seen recently and in late March, signaling a resurgence of stability in FX markets. Implied volatility for one-week expiry options will reflect any additional realized volatility risk premium for June's U.S. monthly jobs data to be released a day early, on Thursday, due to the U.S. Independence Day holiday on July 4.

The USD may experience heightened demand as month-end FX rebalancing flows come into play, but this could lead to new selling opportunities as the market anticipates further declines in the USD in the long run. Risk reversal options show a current absence of directional risk premium for EUR/USD over a 1-3 month period, following a peak in early April when top strikes surpassed downside strikes, before settling into a minor downside strike premium last week. The EUR/USD options market holds a significant number of existing upside strikes, which may impede additional FX gains. Traders should be mindful of over 5 billion euros in 1.1600 strikes expiring on Thursday, the hedging of which could help stabilise the FX spot price. On the other hand, USD/JPY options have become less volatile and cheaper for those betting on a drop, with one-month implied volatility at 9.75 and a 1-month 25 delta risk reversal showing that there are more calls than puts at 1.15 JPY. Price reductions present more appealing levels for those seeking to capitalise on a lower USD/JPY.