Intervention fears impact short-term options

As the market is lurking around all-time lows in both USDJPY and EURCHF, it is interesting to follow the development of short-term pricing of vanilla options. A regular theme in the options market is central bank intervention, or as we should more correctly put it: the fear of it. Both in USDJPY and EURCHF we see indications of how short-term interbank options are being priced to hedge the risk of a possible intervention by either the central bank in Japan or Switzerland.  For instance, we have noted some steady interest to purchase intra-week USDJPY upside options, in particular when spot approaches the 80 level.

Note that this is a phenomenon not seen in mid or long-term dated options, which adds to the assumption that market players are worried about the very near future. An intervention could lead to a quick move in spot, and therefore provide opportunities to trade, and earn from, gamma. As longer term options do not contain much gamma, they are less interesting for this purpose; which is exactly what we see in the interbank market.

High volatility is often stated by central banks to have negative impact on markets, which is the case in for example CHF where it has almost been a one-way spot move. EURCHF O/N implied volatility has been trading relatively high the past couple of months; about 40-50% higher than earlier this year. The O/N EURCHF trading around 15.5% implied volatility today (15 June) is therefore not explicitly high due to the Swiss National Bank rate announcement tomorrow. It could be argued both that after these large moves lower in spot, the large uncertainty and nervousness increases the fear of EURCHF continuing its journey south. On the other hand, one could argue that O/N vols are higher due to fear of intervention. In the past the SNB has intervened on a day of rate decisions; which could be part of the recent uncertainty, but one should not forget that the economic climate has changed quite a bit in Switzerland since the days when intervention had reason and could make an impact.

As mentioned earlier, we also see an interesting behaviour in short-term USDJPY options in that vols are being kept at relatively high levels; the market is preparing itself, or at least hedging itself against, a short-term move. Spot USDJPY level at 80 has been playing an interesting part the past half year. We have noticed both that RR are moving closer to parity in the short term (moving towards favouring calls) and an increased interest to buy short time upside.