The biggest move was in the overnight tenor, where volatility jumped 9 vols to 25%. One-month vols were trading at 16% from 14.4% on Tuesday. 1-year vols also traded higher to 15.4% near the end of London trading. Meanwhile, EURUSD 1-year risk reversals traded at an all-time high of 4.45 in favour of euro puts, up from 4.43 on Tuesday.
Dealers have highlighted in recent weeks how the skew on risk reversals favouring euro puts has remained elevated while implied volatility has softened by about 2% over that period. That seems to have corrected itself and reduced demand for structures designed to take advantage of this downside skew by putting on either, put spreads, reverse knock-ins, or knock-outs, and also euro put-flies.
Option traders say that flow has been light, with a lack of large-sized trades, with much of the price activity in the overnight tenor concentrated in the interdealer broker market. Citi options notes that at a level of 25 vols, the breakeven is 143 pips either side of the straddle, indicating how nervous the market is, Citi says.
Across the curve though, opinions on how far vols can rise is mixed. EURUSD implied vols are already high relative to realized. One trader notes that 1-year realized vols never rose above 16.5% in 2008. Nonetheless, these are unprecedented times, and should other peripheral sovereigns be roiled one-year vols could easily trade as high 17%, another trader says.