July 16 (Reuters) - Hopes for fiscal unity surrounding a European Union rescue package have driven demand for euro, so volatility is certain after this weekend's EU summit, at which the 27 countries are expected to hammer out the details.
The forward-looking nature of FX options and their reliance on actual FX volatility makes them ideal for gauging the expected reaction.
Dealers report demand for Monday expiry options - DTCC data shows a huge 6 billion euros between 1.1300 and 1.1500, the bulk between 1.1350-1.1400 - so clearly volatility's expected, as holders will be trading cash against those strikes, trying to capture actual volatility.
Current pricing shows Monday implied volatility at 9.5 - a break-even for a simple vanilla straddle, between now and Monday's 10 a.m. New York cut expiry, of 90 USD pips in either direction. By comparison, one-week implied volatility has eased from 9.0 to 8.0 since Wednesday - just 10-pips more premium than Monday's expiry, despite additional days. This suggests a decent initial reaction Monday. Related comments
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.