EM options taking the lead

The survey of 11 banks found nearly $13 trillion of overall options trading volumes for US dollar/all other non-European Union, representing 33.6% of total trades.

“The difference is that investors are now using options to express carry trades, this is one reason volumes have increased,” said Peter Rading global head of forex options trading at Royal Bank of Scotland in London. He pointed to hedge funds and bank prop trading desks buying Turkish currency calls to exploit the interest rate differential between the US and Turkey as an example of where the demand is coming from.

Euro/dollar was the single most actively traded currency pair, according to the survey. Total volumes stood at $7.7 trillion, 20.2% of the total. Dollar/yen options were the next most active, with 15.5% of the total. The trade in these units was strong despite low volatility The implied volatility for three-month euro/dollar options, which usually averages 10%, fell to 8.5% in October for euro/dollar and 8% for dollar/yen.

The strong demand for these options can be partly explained by the popularity of range trading over the past 12 months, said Frank Rawlins, European head of currency and metals trading at JP Morgan in London. Traders can benefit from the limited movement of a currency by writing double no-touch options. Here the options writer profits if the underlying spot currency exchange rate trades within a pre-specified range during a certain period. As more and more investors make these trades it becomes more likely that the currencies will remain trading in ranges. “These trades can be seen as self-fulfilling prophesies,” said Rawlins.

Interest

Long-term maturity products saw an increasing level of interest from the options market. Options with a tenor of more than 18 months made up 17.8% of the total. Rawlins put the stronger interest down to increased participation by corporates, pension funds and other long investment-horizon investors.

Data for the survey came from 11 banks that gave confidential access to their trading volumes and other data across 12 currency pair categories.