FxWirePro: AUD/USD theta shorts on its functionality as underlying goes in range, uphold delta longs for optimized hedge ahead of RBA

Bearish AUDUSD scenarios below 0.72 given: 1) the unemployment rate moves back towards 5.75%, raising the spectre of RBA rate cuts; 2) the Fed responds to firm labour market outcomes and above-trend growth by delivering a faster pace of hikes than currently expected; 3) If US-China trade tensions remain the market focus in coming weeks, then the further bearish risks are to 0.72/0.73 mark. China to implement retaliatory tariffs on USD60bn of US imports, conditional on the US proceeding with recently announced measures or 4) risk markets retrace and vol rises as trade war fears escalate.

Weighing on AUD factor have been a pullback in major commodity prices, metals, in particular, investor apprehensions over US-China trade turmoil and the Fed's ongoing optimism on the US economy. 

OTC outlook and Options Strategy:

We have advocated delta longs for long-term on hedging grounds, more number of longs comprising of ITM instruments and theta shorts in short-term to optimize the strategy (as shown below).

The execution of hedging strategy: Short 1m (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 3m (2%) ITM -0.79 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

Since the trend of this pair has been drifting in range as you can see the rectangular area on the daily plotting of above technical charts and such price behaviour has been prolonged from last 4-6 weeks, theta shorts in OTM put option has gone worthless and the premiums received from this leg is sure profit.

Most importantly, please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.7150 levels (above nutshell). While bearish delta risk reversal also substantiates that the hedging activities for the downside risks remain intact ahead of this week’s RBA’s monetary policy.

Accordingly, we would like to uphold the same option strategy as stated above on hedging grounds.

Thereby, deep in the money call with a very strong delta will move in tandem with the underlying.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price dips and bid 2m risks reversals to optimally utilize delta long put options with a view of arresting bearish risks.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 72 levels (which is bullish), while hourly USD spot index was at 25 (mildly bullish) while articulating (at 08:14 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex