Call options for stronger dollar are getting costlier

The cost of betting on further dollar gains in the options market rose to the highest since November as the US economy’s resilience drives demand for the currency.

The Bloomberg Dollar Spot Index climbed to a five-month high as Treasury yields jumped after stronger-than-expected retail-sales data prompted traders to pare bets on Federal Reserve interest-rate cuts this year. The greenback has already risen to a 34-year high versus the yen, and the strongest in five months versus the euro, pound and Australian and New Zealand dollars.

The dollar-buying frenzy is even spurring speculation the currency will regain parity against the euro for the first time since November 2022. Leveraged funds are now holding their biggest bet in more than two years that the greenback will rally further.

Still, investors wanting to profit from further dollar gains by buying call options — which increase in value if the greenback strengthens — are finding out that it comes at a steeper price. The premium to speculate on the dollar rising over the next three months compared with it falling has risen to the highest level since November. 

“Markets are now heeding the risk that the dollar could return to last year’s highs and are hedging accordingly,” said Simon Harvey, head of foreign-exchange analysis at Monex Europe Ltd. in London. “The three-month tenor in options is especially interesting in this context as we suspect rate differentials should notably diverge in favor of further dollar appreciation in the second quarter.”

Call options premiums may be capped if the dollar faces resistance to further gains. Slow stochastics, a momentum indicator, on Bloomberg’s Dollar Spot Index have moved into oversold territory. That indicates further near-term dollar upside may be limited.