Given the forward looking nature of FX options, their price action and trade flows can offer clues on the perceived outlook for a currency pair and there’s a definite theme in USD/JPY.
The realised FX volatility on which FX options thrive is an unknown, yet key parameter of the premium, so dealers use implied volatility as a substitute. Any disparity between implied and realised volatility over the life of the option therefore creates a trading opportunity.
