COMMENT-FX options primed for PMI driven EUR/USD volatility and losses

Price action in forward looking FX options shows a EUR/USD market fearful of increased volatility surrounding Friday's euro zone PMI data and the potential for EUR/USD to extend recent losses in its wake.

FX volatility is an unknown yet key parameter for an FX option premium, so dealers use implied volatility as a stand-in. Any disparity between implied and realised volatility can therefore be monetised.

Overnight expiry is the next working day at 10-am New York/3-pm London and now includes Friday's PMI data. Its implied volatility has increased from 10.0 to 13.0 - a premium/break-even for a simple vanilla straddle of 44 USD pips to 57 USD pips in either direction. That's not insignificant and highlights the perceived potential for the data to increase actual/realised volatility. Implied volatility in other dates is firmly underpinned of late.

EUR/USD FX options hold an implied volatility premium for downside over upside strikes across all maturity dates as shown by option risk reversal contracts. This premium has increased over recent trading sessions to new highs since July.

Higher implied volatility and downside strike premiums amid a relatively range bound FX spot market suggest traders are growing more anxious about a deeper EUR/USD decline that would fuel actual/realised volatility.

This scenario could certainly be realised if Friday's euro zone PMI data falls further into contractionary territory.

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