Dec 17 (Reuters) - Overnight JPY options expire the next working day at 10 a.m. New York/1500 GMT and now include the Bank of Japan policy announcement. The increased premium for these options will therefore offer clues about the amount of additional JPY-related volatility that traders think the BoJ might generate.

Implied volatility is a substitute for the actual/realised volatility which is an unknown, yet key, parameter of the option premium.

Overnight expiry USD/JPY implied volatility also includes Wednesday's U.S. Federal Reserve policy decision, so it's harder to gauge the BoJ alone. However, it's increased quite significantly from 12.5 on Tuesday to 26.0 on Wednesday, which is a premium/break-even of 80 JPY pips to 166 JPY pips.

EUR/JPY might be a better gauge of pure BoJ volatility risk premium, with its overnight expiry implied volatility increasing from 13.5 early Tuesday to 23.0 on Wednesday - an increase in premium/break-even from 91 JPY pips to 155 JPY pips and its highest level since September.

Options that expire in the immediate wake of the BoJ have seen an increase in their premiums for JPY calls over puts - the right to buy the JPY versus sell it. This price action suggests that a BoJ rate hike is not being ruled out and, if realised, would lift the JPY and JPY-related FX volatility.

Are FX options underpricing US Fed risk to EUR/USD?

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(Richard Pace is a Reuters market analyst. The views expressed are his own. Editing by Mark Potter)

((Richard.Pace@thomsonreuters.com))