The options landscape paints a telling picture

Sentiment is a big driver in FX so if the big players in the market are not expecting a price to go higher or lower, it’s often the case that they’re right because they’re the one’s trading it.

As we’re fond of looking at, the options market can help tell that story. When USDJPY fell at the start of the year, there was very little options coverage below the 105/104 levels. That showed traders confidence that we weren’t going lower. If they were worried about further downside, we would have seen greater options coverage as protection. Likewise, we’re seeing a similar picture above 110, as we’ve pointed out previously but there’s a few traders who are starting to hedge a possible move higher.

Option coverage for strikes around the 111.50 area have picked up but they’re mostly short-term with 2 week to 1 month expiries. Some of this could be Fed related with the June FOMC coming. We’ll have to see how the board develops but it’s a possible early sign that traders see the moves in yields and the broad dollar strength filtering though to USDJPY. The fact we’re only seeing coverage around 111.50 still keeps the narrative that a big move higher is not expected.

Just because the options tell a story that traders expect a 104/110/111 range, doesn’t mean the price won’t break out but the options picture is a good insight to how traders are viewing the landscape. If topside or downside option activity increases, that’s a sign of players getting a little bit more nervous about the possibility of big price moves, and that in itself can be a signal and trigger for the price to actually move.

But, options are also a sign of volatility and despite what we’re seeing in FX and bond markets around the globe, the options vol indicators are still relatively low.

It’s an apt reminder for price action as USDJPY pushes back up from the 110.00 level, as the break buyers step in to protect the level, but are then faced with the barrier at 110.50, and big stops said to be lurking there too. We’re also hearing that there’s further large stops sitting around 110.80 and as per the options post earlier, I wouldn’t be surprised to hear of another barrier up at 111.00.

Lots to consider for this pair but it seems to be the bystander at the moment, which is making it slow going.

Ryan Littlestone

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