January 30, 2013 / 3:46 PM / 5 years ago

Option traders bet on more euro gains in coming weeks

* One-month risk reversals show new bias for euro calls

* First time in three years 1-month risk reversals have flipped

* Move seen heralding near-term euro gains

By Anirban Nag

LONDON, Jan 30 (Reuters) - A rally in the euro to it highest in 14 months against the dollar shows no sign of fading with investors in the options market betting for the first time in three years on near-term gains in the single currency.

While a yet stronger euro could make European politicians more uncomfortable, with some warning of a “currency war”, investors are so far unperturbed.

The single currency has made broad gains this year, boosted by European Central Bank chief Mario Draghi cautious optimism about the region’s recovery and euro area banks returning some of the cheap loans they took from the central bank last year.

The euro’s gains come as the Japanese authorities are trying to weaken the yen by easing monetary and fiscal policies, while the U.S. Federal Reserve has unleashed a fresh dose of asset purchases aimed at reviving the sluggish jobs market.

Closer to home, the risks of a euro zone break-up have waned since the ECB pledged to buy bonds of struggling countries that sought its help. All this has left the euro more attractive to investors and speculators who had bet against the currency for much of 2012.

Investors are steadily buying options that bet on euro gains in the next month. This is the first time in three years that such bets have been placed, option traders said.

The one-month risk reversals, which measure of the relative demand for options on the euro rising or falling against the dollar, flipped in favour of euro calls -- bets the currency will rise -- from puts just last week.

Option traders reported deals struck at 0.15 vols in favour of euro calls on Wednesday.

One-week risk reversals also show a bias for euro calls, implying gains are likely to be sustained in the very near term, despite the euro having risen sharply past $1.35 on Wednesday.

“The rise in the euro in the spot market has seen the one-month euro risk reversals flip towards calls after having teetered between puts and calls for some time,” said a chief options trader at a large European bank in London.

“Things are looking up for the euro. It’s not that there is heavy positioning for long euro strikes, but if the spot continues to move higher, we could see the risk reversals along the curve also flip.”

Traders said three- and six-month risk reversals are still showing a bias for euro weakness, but the premium to buy options on a weaker currency is eroding.

“We continue to get asked for euro higher structures in euro options,” said Nigel Khakoo, head of global FX options trading at Nomura.

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