FX Volatility Strategy: What to Long, Short, and When

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FX Volatility Strategy: What to Long, Short, and When

Ladislav Jankovic AC (1-212) 834-9618 Yangyang Hou AC (1-212) 834-6734 Global Markets Strategy J P M O R G A Nladislav.jankovic@jpmchase.com yangyang.hou@jpmorgan.com

J.P. Morgan Securities LLC 17 July 2026

Sanjana Shinde AC (1-212) 622-2001

sanjana.shinde@jpmchase.com

Figure 6: VXY regimes can be distributed depending on the vol curve steepness.

1M vs 3M VXY, with +/- 1 std band around the long-term mean.

Source: J.P. Morgan.

Across regimes, ATM structures exhibit Sharpe ratios that remain persistently close to

zero, largely irrespective of tenor or curve shape (Figure 7Sharperatioforholdingshortdelta-hedgedoptionsatdiferenttenorandstrikecombinationsinspecifictermstructures.). Similar to the conclusions

drawn from the VXY analysis, volatility premia around ATM appear broadly fairly

priced, leaving little excess premium to cushion realized volatility outcomes and

resulting in limited structural edge.

By contrast, historical performance has been stronger on the call side, suggesting that

markets tend to overstate spot-volatility correlation in that direction. Inverted curves

typically coincide with risk-off environments, and tend to see skew perform as USD up

and vol up tend to coincide, which are generally unfavorable for skew-selling strategies.

As a result, harvesting skew premia is effective only in risk-on environments, a

backdrop that rarely overlaps with inverted volatility curves.

Consequently, front-end tenors tend to be the most attractive vehicles for collecting

overpriced spot-volatility correlation. Their historical performance is strongest during

more normal market conditions, when realized volatility remains contained and

volatility carry can be more consistently harvested through option selling.