FxWirePro: Both speculating and hedging worth on USD/CAD binary calls and costless collars

Spectacular speculating opportunities seen in USD/CAD binary calls as implied volatility is increased on the verge of Ivey's PMI on Canadian side and ISM non-manufacturing PMI from US side. Buying binary call at every dips may fetch 15-20 pips.

The hedgers are advised to buy 60D (far month) At-The-Money -0.48 delta put (strike at 1.2619) while holding same quantity of outrights in spot FX and simultaneously writing 15D (near month) (0.5%) Out-Of-The-Money call (strike at 1.2684) with positive theta value.

As you can observe on the above diagrammatic representation of this strategy, almost more than 50% of the hedging cost is contributed through OTM call writing. (Note: for demonstration purpose we've used same maturity, in real time there has to be shorter time for expiry on writing side).

But always have this in mind that the shorting instruments with +ve theta to be analyzed with other option Greeks during selection of such short side options.

Supposing that call write using ITM call in the above strategy at current position is perceived as a risky venture then the zero-cost collar is recommended to participate in the potential bull run on verge of surge in the dollar.

This position is established by buying close to -0.5 delta At-The-Money protective put option while writing 15D Out-Of-The-Money covered calls (strike at 1.2684) with around +ve Theta value.

The strike price at which the premium received (i.e CAD 1443.66) cushions as the premium of the protective put.