Vol Selling in FX and Commodity Markets
Selling options in currencies and commodities harvests the volatility risk premium the same way equity vol-selling does, but carry, seasonality, and central bank intervention give FX and commodity vol its own distinct risk profile.
Selling options in equities is a well-known trade: implied volatility tends to run higher than realized volatility, so systematically selling options and collecting the difference has historically been a profitable, if crash-prone, strategy. The same volatility risk premium shows up in currencies and commodities, but the drivers behind it are different enough that it isn't just "equity vol selling with a different underlying."
FX and commodity implied volatility carries its own premium for the same core reason as equities — sellers get compensated for bearing tail risk — but the specific tails being insured against are currency-peg breaks, central bank surprises, and supply shocks rather than equity market crashes, so the strategy's risk calendar looks very different.
In FX, a large share of the volatility risk premium is concentrated around known event risk: central bank rate decisions, elections, and — historically — pegged or managed exchange rates that can snap violently when a peg breaks, as happened when the Swiss National Bank abandoned its EUR/CHF floor in 2015 and moved the pair over 20% within minutes. Selling FX options systematically therefore means being compensated most of the time for a risk that is dominated by rare, policy-driven jumps rather than the continuous market-crash risk equity vol sellers are pricing.
In commodities, vol selling interacts with strong seasonality — natural gas or agricultural options carry structurally higher implied volatility around planting, harvest, or winter-demand windows — and with physical supply shocks (a weather event, an OPEC decision) that don't have a direct equity analogue. Because these risks are less correlated with equity market vol, commodity and FX vol-selling programs are often used by institutional allocators specifically for diversification against equity-vol-selling strategies, even though both harvest a similar-looking premium.
Practice in interviews
Further reading
- Bhansali, Volatility and Correlation (ch. 6)