EUR/USD volatility is trading close to its lowest level since the start of 2015, current ATM IVs are at 9.9%, likely to reduce to 7.38% in 1W expiries.
But, implied volatility is probably at the floor of a persistent and stable high-volatility regime, suggesting a substantial likelihood of mean-reversion towards higher levels.
Volatility more predicable within its range, in a regime of high and stable volatility, implied volatility has been strictly range-bound at relatively high levels for more than a year. If the stability persists, volatility will become more predicable within its range.
We get more insight in running a three-state Markov switching model on 3m implied volatility since the start of 2010.
In this framework the regimes persist over time, and switches thus announce significant turning points in market dynamics. It turns out that the model switched into a high-vol regime when the range-bound period started and that this regime still prevails. Therefore, the current regime may encapsulate both the volatility level and its stability.
Bounce in realised volatility is most likely upon event risks:
The 3m realised volatility is approaching 8. It now seems at a threshold between two price-action regimes. With the spot returning towards the middle of its range, it is now unlikely that volatility will experience a regime switch.
The odds favour a bounce in realised volatility, as the spot should remain turbulent. The 3m tenor includes the 2 June ECB meeting, the 15 June Fed meeting and the 23 June UK vote.
Hence, we believe these rising vols can play a vital role in option holders for sure especially in 2m & 3m tenors, longs in any hedging strategies are advisable, more proportions in hedging positions would fetch desired outcomes.
The material has been provided by InstaForex Company – www.instaforex.com