FxWirePro: AUD/USD IVs and skew signify more probabilities of OTM put strikes finishing ITM

OTC IVs and sensitivity table, we consider 1M ATM IVs at 12.00% at spot FX 0.7332 levels which is still the highest among G10 currency pool and 11.89% for 1W tenors.

The implied volatility here is significant while trading FX options, as the price of FX option depends on future volatility, although it is impractical for anyone to guess accurate future volatility, however, it is possible to calculate the marketplace’s expected future volatility using the option’s price itself.

One of the most interesting aspects of volatility analysis is the phenomenon known as a price skew. When options prices are used to compute implied volatility (IV), what becomes apparent from a look at all the individual option strikes and associated IV levels is that the IV levels for each strike are not always the same - and that there are patterns to this IV variability. 

If you shift the view on lower strikes (let’s say 0.7250) the skew is rising to 0.37%.

Skew refers to the situation where at a given strike price, IV will either increase or decrease as the expiration month moves forward into the future.

When a skew develops into a smile, there is an expectation of greater price movement in the future, causing the chart pattern to turn up into a smirk or smile.

Subsequently, let’s have glance on sensitivity table for the different rate scenarios and their probabilistic outcomes. We've just referred 0.25% OTM strikes and their vols, it showed 0.42 as delta values for underlying outrights, that means 42% chances of finishing in-the-money.