One-month risk reversals on USD/JPY, a gauge of calls to puts, rose to -2.17 on Tuesday to hit the highest level since Feb. 27. The options market metric bottomed out -11.10 on March 16.
The surge from -11.10 to -2.17 indicates a weakening of demand or a drop in the implied volatility claimed by the bearish bets or put options and validates the recovery rally in the U.S. stock markets seen over the past few weeks.
The demand for anti-risk assets like the Japanese yen tends to rise during times of stress in the financial markets. Investors typically buy USD/JPY puts, leading to a slide in the risk reversals, when they expect the equity markets to trade risk-averse.
That said, risk reversals are still trading in the negative territory, meaning the put options are claiming higher volatility than the call options or bullish bets.
Risk reversals
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