Please be noted that the implied volatility for near month at the money contracts of this APAC pair has been dropped below 10% for 1m expiry.
While delta risk reversal reveals divulge more interests in hedging activities for downside risks. As a result, we can understand ATM puts have been costlier where the spot FX market direction of this pair is heading towards 0.7677 technical levels where we see stiff resistances. So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings and bid on 3m risks reversals.
The OTC options market appeared to be more balanced on the direction for the pair over the 3m to 1y time horizon and as a result delta risk reversal for AUDUSD has been maintaining negative which means puts are in higher demand and overpriced comparatively.
Hence, AUDUSD's lower IV with negative delta risk reversal can be interpreted as the market reckons the price has downside potential for large movement in the days to come which is resulting option writers on competitive advantage and making derivatives instruments for downside risks have been overpriced and fresh shorts are more on the cards.
As shown in the diagram, contemplating the above risk reversal computations and technical reasoning, we construct strategy comprising of both calls as well as puts in the ratio of 3:1 so as to suit the swings on either direction.
Capitalizing on lower IVs we eye on shorting at the money calls with shorter expiries which would lock in certain yields by initial receipts of premiums and risk reversals to favour the longs in puts in lengthier tenors.
Well, here goes the strategy, go short in 1m OTM calls and simultaneously, 3 lots of 3m puts (+1% ITM, ATM and +1% OTM strikes) are preferred to suit the prevailing losing streaks. So thereby the combination would be executed for net debit and the cost is reduced by short side.
Moreover, the strategy could be counterproductive as the skews in 3m IVs favours OTM puts strikes.


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