One-month risk reversals on USD/JPY, a gauge of calls to puts, rose to -2.17 on Tuesday to hit the highest level since Feb. 27. The options market metric bottomed out -11.10 on March 16.
The negative reading indicates the implied volatility or demand for puts or bearish bets is higher than for calls. However, the metric has surged from -11.10 to -2.17, which indicates a weakening of demand or a drop in the implied volatility claimed by the bearish bets or put options and validates the recent recovery rally in the U.S. stock markets. As of Monday, the S&P 500 was up over 25% from the low of $2,192 reached on March 24.
The demand for anti-risk assets like the Japanese yen tends to rise during times of stress in the financial markets. Investors typically buy USD/JPY puts, leading to a slide in the risk reversals, when they expect the equity markets to trade risk-averse.