Treasury Option Action: bullish
risk reversals are in vogue today, according to sources who report buyers of 8k in April 120.
Summary: One-month implied volatility on cable has risen 13% while
risk reversals have swung 20bps
This paper investigates whether
risk reversals (RR)--a measure of the skewness of exchange rate expected distribution--contain information about future returns of emerging market currencies.
One-month
risk reversals -- a measure of relative demand for options on a currency rising or falling -- showed an increased bias for euro puts, or bets the currency will weaken.
USDXAU 3mth 25 delta
risk reversals have broken out to the downside of three-year lows and the relationship between inflation-adjusted US government bond yields and the price of gold also appears to be broken.
Charts, the graphical illustration of
Risk Reversals and Implied vs.
Aussie one-month 25 delta
risk reversals -- seen by many as a barometer for short term fear -- were once again showing an extreme bias for puts, sitting at 4.
What are
Risk Reversals:
Risk reversals are the difference in volatility between similar (in expiration and relative strike levels) FX calls and put options.
Interestingly EUR-USD
risk reversals have now inverted in favor of EUR puts instead of EUR calls out to 6-months (page 12), this may reflect hedging of either outright long EUR or short vega positions via the accumulation of EUR puts.
The most popular option combinations traded on the market are straddles,
risk reversals, and strangles.
Despite the yen's gains, sentiment toward the yen continued to remain negative, with twelve-month
risk reversals continuing to be skewed toward yen puts, reflecting a higher cost of protection against a sharp depreciation of the yen against the dollar.
