FX Options Insights: 23/1/26
The FX options market had a turbulent week, with the unexpected Trump-Greenland saga causing early spikes in implied volatility. Markets were shaken, and demand for options surged on Tuesday. However, as Trump walked back his comments during Davos, volatility eased, and prices returned to more stable levels. Still, the calm may only be temporary. Concerns over geopolitical tensions and risks tied to Greenland haven’t disappeared. The USD remains slightly weaker with room for further downside, while the AUD rallied sharply on growing optimism around a potential RBA rate hike. On the other hand, JPY bears are on edge, with the threat of intervention looming even before Japan’s upcoming elections – all good reasons to keep some option protection in play.
In the EUR/USD market, implied volatility picked up as spot prices climbed back above 1.1700. Over the week, 1-month implied volatility fluctuated between 5.5-6.15-5.0-5.4. Risk reversals signalled a clear shift in sentiment, with topside strikes commanding a premium over downside strikes. By midweek, this premium hit 0.5 – the highest level since October – reflecting rising expectations for further EUR/USD gains. In the AUD/USD space, options initially anticipated a gradual rise in spot prices. But strong local employment data reignited hopes for an RBA rate hike, propelling the pair to its highest levels since 2024 in the mid-0.68 range. This rally sparked fresh demand for outright options, driving up implied volatility and fueling interest in AUD calls. For those bullish on the AUD but who missed the initial jump, RKO options present a cost-effective way to join the action.
Meanwhile, the Bank of Japan kept its policy unchanged on Friday, but the yen’s post-decision slide was abruptly halted by a sharp reversal. USD/JPY dropped from just above 159 to 157.30 amid speculation of official rate-checking activity. This sparked a surge in shorter-dated FX option premiums as traders scrambled for intervention hedges. Short-term implied volatility is now testing recent highs not seen since 2026. Additionally, JPY call-over-put premiums via 1-month 25-delta risk reversals climbed from 0.8 to a new peak of 1.2 – their highest level since September. The yen’s unpredictable movements highlight how critical it is to stay prepared for sudden market swings.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!