FxWirePro: A Run Through on EUR/USD Diagonal Options Strips

Despite the breakdown in trade talks between the US and China at the end of last week, which saw the US increase tariffs of $200bn worth of Chinese goods to 25%, broader market sentiment seems to have stabilized. US equities are finding buying interest on the current pullback, while the USD vs G10 remains in its short-term range.

EURUSD bulls are extending weekend rallies today but the prices seem to be coming back under pressure at 1.1241 (i.e. day highs). Our analysis has been more positive in the last few days, but prices have stalled under 1.1265. As such, a move through here and then 1.1330 is needed to add conviction that a base has developed at 1.1112 for a move towards the range highs. Such a break should allow for a further test of the 1.1450 and 1.1570 key resistance levels. A slide back through 1.1200-1.1160 would negate some of the basing structures and risk another new low, possibly after some further range trading.

Overall, on a broader perspective, the prices are within our long-term 1.1200-1.0800 basing region, we still have little evidence of a base developing. A rally back through 1.1315 would be a start, but 1.1450 and 1.1570 are further important hurdles in that process.

Option Strategy: Options Strips
Combination ratio: (2:1)

The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors, go long 1m at the money +0.51 delta call option simultaneously.

The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside.

Rationale: Please be noted that the positively skewed IVs of EURUSD of 3m tenors signify the hedging interest of bearish risks (bids for OTM put strikes up to 1.10 levels).

To substantiate this stance, the negative risk reversals across all tenors also indicates bearish risks remain intact in the major trend, while positive bids indicate mild upside risks in the short-run.

Well, contemplating above-stated driving forces and OTC indications, options strips strategy is advocated on both trading as well as hedging grounds. The options strips strategy which contains 3 legs needs to be maintained with a view to arresting price downside risks.

Considering the bullish (in near-term) and bearish technical environment (in long-term) and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers. Courtesy: Sentry, Saxo & Lloyds banks

Currency Strength Index: FxWirePro's hourly EUR spot index is showing 78 (which is bullish), while USD is flashing at -88 (which is mildly bearish), while articulating at (10:35 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex