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Demand for Upside Protection Swells Options Volumes

JPY
  • DTCC data shows upside protection remains the dominant driver of FX options trades so far Wednesday, with approximately $3 in calls trading for every $2 in puts. The average call strike price has naturally moved north this week, with particular demand for Y152.00 and Y152.90-10 strikes, however interest is noted as high as Y154.00 and Y157.00.
  • A series of structures trading in early Asia-Pac hours typifies the demand for upside hedges that cover the immediate risk of further strength, with Y150/152, Y150.75/152 and Y150.50/152.10 call spreads all trading in size today.
  • Suitably given the move in spot, the front-end of the risk reversals curve has nudged higher, helping tip the 1m risk reversal to 0.5 points in favour of puts, a sharp corrective from the 1.5 points posted one month prior.
  • The move in spot is making the analyst consensus for year-end look increasingly dated at Y146.00, with options markets now implying a 49% chance that the pair will close the year above Y150.00 (up from 36% one month prior). The implied odds for lower delta moves are also rising, albeit at a more muted pace: a Dec31 close above Y155.00 is seen as a 14.6% chance today, relative to a 13.4% chance at the beginning of October.
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