Jan 13 (Reuters) - Demand for GBP-related FX options has surged over the last week, taking their premiums to ever new highs since March 2023 and highlighting the gravity of the perilous situation in which the British pound now finds itself.

FX options are forward looking and thrive on FX volatility and rapid directional moves. Their price action can therefore highlight any shift in market sentiment and expectations for the future spot price.

Implied volatility gauges expectations of actual/realised volatility and is a key parameter of the options premium. It has surged to new highs since early 2023 across the entire GBP/USD term structure. The benchmark 1-month expiry contract has jumped from 8.0 to 11.0 in January alone and from 6.5 in early December.

Risk reversals charge an implied volatility premium for strikes in what is perceived to be the most vulnerable FX direction versus a discount for strikes in the other. GBP/USD downside strikes have been ramped to new 2-year highs over the last week.

Trade flows are indicative of currency expectations and there's been a surge for various types of options that would benefit from a lower spot price over the next few months. The right to sell GBP/USD at 1.2000 has been extremely popular and some traders are even covering the risk that GBP/USD might even be below 1.1500 by the second half of 2025.

There are plenty of key U.S. and UK data prints this week that could favour holding related shorter dated expiry FX options.

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

((Richard.Pace@thomsonreuters.com))