Demand for EUR/USD downside protection through options has surged. Implied volatility is at its highest since April, and the market is positioning for deeper EUR/USD declines.

Benchmark 1-month expiry implied volatility broke through the June 24 high at 6.15 early Thursday to reach 6.55, a new high since April. That's a sharp turnaround from the long-term lows at 4.5 in mid-September. The latest gains came after the removal of 1.1300 option barriers, which opens the door to further losses.

Demand has been particularly strong for downside strikes, especially December 18 expiry 1.1100 strike EUR put/USD call options, which is alleged to have traded as much as €2-billion in London early on Thursday. This contract gives the holder the right to sell EUR/USD at 1.1100 on December 18 if that is favourable to the spot price. However, EUR/USD spot doesn't need to be below 1.1100 at expiry for the option to increase in value. That would happen if spot extends losses and implied volatility extends recent gains.

Risk reversals tell the same story. They are a volatility play but a directional one. The implied volatility premium for EUR puts over calls on the benchmark 1-month 25 delta risk reversal has risen from 0.85 to 1.1 so far on Thursday. That beats the late July peak at 0.9 for a new high since April.

Overnight expiry options show the market bracing for Friday's non-farm payrolls. EUR/USD overnight implied volatility has jumped from 9.0 to 11.25 since including the data, a break-even of 53 USD pips in either direction. That's close to levels seen before the September 16 Fed announcement, which shows how seriously the market is taking the NFP as a test of the USD's direction.
EUR/USD FXO implied volatility


EUR/USD 25 delta risk reversals-

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