Options activity: Open Interest in JPY calls surges, investors favor downside in EUR

The bullish long legged Doji reversal does indicate that the Dollar-Yen pair has bottomed out at 110.62, although the CME options data show the investors are treating Tuesday’s price action as a potential bull trap. 

JPY/USD JPUQ7 Open Interest Change: Current (Jul 25 - Prelim) vs. Jul 24

A big jump in the open interest (OI) positions in the OTM put options coupled with a drop in the OI in the ITM puts indicates the markets expect the rally in the Japanese Yen to continue in the days ahead. The OI positions in the OTM puts improved as well, although this could very well be due to put writing ahead of the next week’s expiry. 

The theta decay (time value) decay is the fastest in OTM options. ITM options hold intrinsic value plus time value. 

EUR/USD - Investors positioned for a pull back

EUR/USD ended with a ‘gravestone doji’ like formation on Tuesday. This particular candle stick pattern points to bull market exhaustion. The large upper shadow of the candle indicates the spike above 1.17 was met with fresh offers/profit taking.

Options data published by the CME add credence to the technical view. It shows - investors continue to boost downside protection via the ITM and OTM puts. 

EUR/USD EUUQ7 Open Interest Change: Current (Jul 25 - Prelim) vs. Jul 24

The investors stand divided on the next move in the EUR/USD if we take into account only the surge in the OI positions in the OTM puts and the OTM calls

However, the table above shows an improvement in the OI positions in the ITM puts by 445 contracts, while the ITM calls witnessed a drop of 87 contracts. This divergence clearly indicates the bias is to the downside. The OI in 1.16 put option jumped by 1068 contracts, while the OI in the 1.18 call and 1.1850 call options witnessed an addition of 985 contracts and 1202 contracts, respectively. 

The technical studies and the options activity clearly point to a pullback in the EUR/USD pair to a 10-DMA level of 1.1561. 

One-month 25 delta risk reversals faded the spike to 3.4, signaling short-term bull market exhaustion. However, the 3-month 25 delta risk reversal turned positive last week, suggesting the market is positioned for a rally over the next three month period.