Foreign exchange options volatility retreats from a high level, but risk factors still provide support
智通财经2026/10/05 13:36(1) After a surge the previous week, implied forex volatility remained elevated on Monday, with the EUR/USD once again leading the way as ongoing concerns over French fiscal issues continued to pressure the euro. (2) During the Asian session, EUR/USD fell below the 1.1200 option barrier, forcing further short gamma position unwinding. The 1-month benchmark implied volatility rose to 7.3%, its highest since March, up significantly from the long-term low of 4.5% in mid-September. (3) As the spot rate rebounded towards 1.1200, volatility eased slightly to 7.0%, but the retracement was limited. Should it break above the March high, it would reach the highest level since July 2025, meaning the cost of hedging large euro swings remains over 50% higher than in mid-September. (4) Risk reversal indicators show similar pressure: the premium for euro put options relative to calls climbed to the highest since March, nearing end-2022 levels, while 1-month contracts were neutral in mid-September. (5) After breaching the 1.1300 barrier last week, demand for strikes near 1.1100 increased. Hedge funds also bought significant volumes of 6-month to 1-year EUR put digital options with strikes in the 1.0700–1.0600 range, fueling further short covering. (6) In other currencies, the 1-month USD/CHF implied volatility rose from 7.65 on Friday to 8.05, and AUD/USD from 8.00 to 8.25. (7) The 1-month option expiry now covers the November 3 U.S. midterm elections and will roll forward to November 11 on Thursday, thus covering the full FX market reaction period. Slow vote counts and possible recounts may mean control of the House and Senate will take several days to become clear, with the results affecting fiscal and tariff prospects. (8) The October 28 Federal Reserve meeting and early November non-farm payroll data also fall within the 1-month window. This event risk premium should help support 1-month volatility and may widen its relative premium over the 2-month tenor, with the highest overnight volatility premium likely for expiry on November 4. (9) If French concerns persist—especially with the 1.1100 region coming into focus—option prices may continue rising. However, if France’s fiscal outlook improves and expectations for a U.S.–Iran peace agreement rise, option prices could retreat.
- After a surge the previous week, implied forex volatility remained elevated on Monday, with EUR/USD once again leading the gains. Ongoing fiscal concerns in France continued to exert pressure on the euro.
- EUR/USD breached the option barrier near 1.1200 during the Asian session, forcing further unwinding of short gamma positions. The benchmark one-month implied volatility climbed to 7.3, the highest since March and significantly above the long-term low of 4.5 seen in mid-September.
- As the spot rate rebounded to around 1.1200, implied volatility trimmed slightly to 7.0, but the pullback was limited. If it breaks the March high, it will reach the highest since July 2025, meaning the cost of hedging large swings in the euro remains more than 50% higher than mid-September levels.
- Risk reversal indicators show similar pressure. The premium of euro put options relative to calls rose to the highest since March, close to late 2022 levels, whereas the one-month contract was neutral in mid-September.
- After breaking the 1.1300 barrier the previous week, demand for strikes near 1.1100 increased. Hedge funds also purchased a large amount of six-month to one-year euro put digitals with strikes in the 1.0700 to 1.0600 range, fueling short covering.
- For other currencies, one-month USD/CHF implied volatility rose from 7.65 on Friday to 8.05, while AUD/USD went from 8.00 to 8.25.
- One-month option expiries now cover the November 3 U.S. midterm elections, and will roll to November 11 on Thursday, thus encompassing the entire FX market reaction period. Slow vote counting and possible recounts may mean that control of the House and Senate will not be clear for several days, and the results will impact fiscal and tariff outlooks.
- The October 28 Federal Reserve meeting and early-November nonfarm payrolls also fall within the one-month window. This event risk premium should help support one-month volatility and may widen its premium over two-month options, with the highest overnight volatility premium likely for the November 4 expiry.
- If French fiscal concerns persist—especially with the 1.1100 zone now in focus—option prices may continue to rise. However, if France's fiscal outlook improves and markets increasingly expect a U.S.–Iran peace deal, option prices may retreat.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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