Well maybe you’re not! Implied volatilities, the main driver for FX option prices and sentiment are typically under pressure on Fridays: market players tend to sell options on Fridays (therefore putting pressure on volatilities), as everyone is keen to reduce their time decay issues ahead of 48 hours of supposed inactivity. So selling options on Friday, and buying them back first thing on a Monday morning has been the name of the game for as long as options have existed. A quick technical note though: interbank pricing has improved steadily over the years to take this weekend effect into account, and opportunities for arbitrage are now few and far between.
So why on earth is everyone buying options today! Indeed it is pretty clear that we are not seeing the usual pressure on volatilities that are typical of the end of the week. At this point I will point you towards our FX Options Analytics published this morning: Let’s look at the first table displaying the change in At-The-Money (ATM) implied volatilities over a 24 hour window:
There is a lot of green! For instance, one month ATM in EURUSD, USDJPY and AUDUSD are up 0.2, 0.6 and 1.05 vols respectively. One week ATM vols are also up significantly across the board. Most of the interbank interest we are seeing this morning are buyers of options indeed.
So why is this the case? Well, implied volatilities for FX options can be seen on market expectations for future movement (not necessarily directional though… just how much is it going to move). And there is a lot of uncertainty right now… and I mean A LOT! Here is a non-exhaustive list of things to bear in mind:
- The U.S. debt situation is as murky as ever… and with the latest vote postponement yesterday evening, it just got a little bit more murkier. If there is no agreement today, we might very well get some sort of news over the weekend, that could make a Monday opening somewhat erratic in the financial markets.
- Stock markets are under pressure all over the world (mostly thanks to this U.S. debt situation).
- The European crisis is far from over, despite the recent Greek bailout package put in place… latest news is Moody’s putting Spain under negative review for a possible downgrade.
- Japanese officials have been more and more vocal about possible USDJPY intervention, saying that they are watching spot carefully but that they won’t do anything before the U.S. situation clarifies somewhat (one way or the other)… that leaves the door open for short term JPY strength, followed by a sharp weakening in the Japanese currency.
- The AUD market got taken aback by the recent CPI number.
- Many currencies, such as JPY and CHF are at extreme levels
- … etc
So what are we looking for next week? … A lot of potential market movers, that’s for sure:
- As mentioned a possible hectic opening on Sunday evening /Monday morning
- Tuesday 2 August RBA interest rate decision
- Tuesday 2 August U.S. debt deadline
- Thursday 4 Aug ECB meeting and press conference (hopefully Jean-Claude Trichet will get some tough questions, and hopefully he will not dodge the bullets as he usually does… one may dream on)
- Friday 5 Aug Non-Farm payrolls (which explains greatly why one week options are so much higher today, as the date now includes this event).
All in all, a lot can go wrong here (or right depending on which side of the fence you are standing on). Owning options is not going to be a bad idea after all, even if this means paying a little bit of time decay upfront over this weekend.
And one thing is for sure… if you think options are expensive now, you’ve seen nothing yet … wait until Monday morning: in all likelihood there will not be a single seller in sight, as every market player will be struggling to cover any short position they might have been left with, and end-users will be rushing in to buy them ahead of next week’s events.