Jan 22 (Reuters) - Plunging FX option premiums have brought relief to investors, but also big rewards to volatility sellers, especially in EUR/USD.
Implied volatility gauges FX realised volatility expectations when determining an FX option premium. In regular vanilla options, a higher implied volatility equals higher premiums, and vice versa.
Those trading volatility will use a cash hedge to eliminate currency risk, with profit and loss determined by changes in implied and/or realised volatility.
Traders who sold a typical 30 million euros of 1-month expiry EUR/USD straddles when its implied volatility was 9.0 on Monday would have banked a premium of 2.02% or 606,000 euros. The implied volatility on that option is now 7.4 and demands a premium of 498,000 euros to buy back, leaving a profit potential of 108,000 euros.
Longer-dated implied volatility changes have more influence on premiums for lesser moves. One-year expiry EUR/USD implied volatility has fallen from 8.0 to 7.2 since Monday - a difference in premium on a 30 million euro trade of 186,000 euros.
For more click on FXBUZ
Benchmark 1-month FXO implied volatility https://tmsnrt.rs/4jiIzaK
1-year expiry USD/USD option straddle https://tmsnrt.rs/3CgJdFc
(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@thomsonreuters.com))
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