• FX options thrive on FX volatility and rapid price movements in either direction and are priced according to that risk

• However, USD/JPY FX option traders face the dilemma of elevated FX break-out risks in a very low realised volatility environment

• USD/JPY is trading tight intraday ranges near multi decade highs ahead of 162.00 over recent sessions

• There's not enough realised volatility to support implied volatility - the 1-month expiry already back at 7.25 from 8.0 this week

• But a break above huge 162.00 option barriers could fuel another USD/JPY surge higher with increased volatility

• A 162.00 break could also be the catalyst for the next bout of official intervention and a rapid USD/JPY reversal

• Butterfly spreads remain a favoured option in this environment - they would benefit from a spot break-out in either direction

• No surprise to see sub 1-month 10 delta butterfly spread still trading near to recent and multi-year highs

• Related comment - FX options ignore US PCE in favour of June NFP data
USD/JPY 10 delta butterfly spreads


Benchmark 1-month expiry FXO implied volatility


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