FxWirePro: AUD/USD calendar combinations for hedging to sync with 1m3m OTC indications

Please be noted that even though the implied volatility for near month at the money contracts of this APAC pair has been dropping, IVs flashing above 11.3% for 1m expiry and spiking higher 11.5% for 3m tenors.

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 0.71 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.

AUDUSD's higher IV with negative delta risk reversal can be interpreted as the opportunity for put longs as the market reckons the price has downside potential for large movement in the days to come which is resulting option holders’ on competitive advantage.

Hence, as shown in the diagram, contemplating the above risk reversal computations, we construct strategy comprising of both calls as well as puts in the ratio of 2:1 so as to suit the swings on either direction.

In a major downtrend of this pair, capitalizing on reducing IVs we eye on shorting out of the money calls with shorter expiries which would lock in certain yields by initial receipts of premiums and risk reversals to favor longs in puts in lengthier tenors.

Well, here goes the strategy, go short in 1m (1%) OTM calls and simultaneously, 2 lots of 3m puts (+1% ITM, and ATM 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 positively skewed 3m IVs to favor OTM puts strikes (please refer IV nutshell).