OTC indications and options strategy:
Please be noted that the positively skewed IVs of 3m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.7450 (refer above diagram).
While delta risk reversal reveals divulge more interests in hedging activities for downside risks even though we see a positive shift in hedging arrangements. As a result, we can understand ATM puts have been costlier where the spot FX market direction of this pair is heading towards 0.74-75 or below technical levels. So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings and bid on 1-3m risks reversals that would encompass Fed’s June meeting.
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.
Accordingly, we had advocated put ratio back spreads a couple of days ago wherein the short leg is functioning as the underlying spot FX keeps spiking.
We advocate weighing up above aspects and uphold the same option strategy on hedging grounds, we eye on loading up with fresh vega longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short term would optimize the strategy.
So, the execution of hedging positions goes this way:
Short 2w (1%) OTM put option as the underlying spot likely to spike mildly, simultaneously, go long in 1 lot of vega long in 1m ATM -0.49 delta put options and 1 lot of (1%) ITM -0.55 delta put of 2m expiry.


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