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.