As we were shorts on AUD while advocating option strategies for bearish risks on hedging grounds, they seem to have performed well so far.

But the story never ends here at this juncture, as per the nutshell evidencing risk reversals and implied vols for 1w – 1y tenors are still signalling renewed weakness of Aussie dollar.

Technically, on monthly charts, Bears restrained upside potential at the resistance of 0.7651, while the massive volumes formations are in conformity to price slumps.

 We begin by testing the performance of long volatility strategies in FX, implemented via plain vanilla put options, on AUDUSD.

Aussie is a good example of a proxy for a long-only position in the FX market. Its high level of interest rates has implied its frequent inclusion as a long position in thematic FX Carry baskets.

It's high beta, comparable to that of some EM currencies, on the other hand, well simulates the behaviour of an asset which is expected to undergo large declines during crisis periods, potentially over short periods of time.

The first chart below considers the performance of a set of strategies rolling 1y maturity puts on AUDUSD, as a function of the delta of the options. Delta-hedging is not implemented, as here the goal is to use options as hedging instruments, rather than a way for arbitraging a mismatch between implied and realised volatilities.

From the chart we see that the performance of 10-delta and 25-delta puts is quite satisfactory, offering a good level of protection when volatility spikes and a contained cost of carry. The high (and negative) theta of the 50-delta put makes it a less appealing candidate for hedging positions in this case.