FxWirePro: CAD/JPY IV skews still signal bearish sentiments imminent – Options strips on track of its functionality

CADJPY is one of the better candidates since recent CAD weakness has undershot recent moves in oil and rate spreads. But any recovery in crude oil prices may cushion CAD in the upcoming days.

Well, please be noted that the positively skewed ATM IVs of 1m tenors indicate the hedging interests of OTM put strikes upto 79 levels, IVs of these tenors are at 10.80%.

On technical grounds, we’ve already stated in our previous post that the current prices have tumbled well below EMA levels coupled with flurry of further bearish indications, such as shooting star and engulfing candlestick patterns (which are highly bearish in nature), bearish DMA, EMA & MACD crossovers with intensified bearish momentum, thereby, one could expect more slumps as both the leading oscillators have been constantly converging downwards to signal weakness. In this process, CADJPY spot FX has tumbled from 91.581 to the current 81.307, more dips seem to be on cards (refer our technical section for more reading).

Well, we reckon that the underlying pair has equal chances of moving on either side but with more potential on the downside, accordingly, we’ve already advocated options strips strategy of narrowed strikes to factor-in all above stated driving forces.

We continue to reiterate it is wise to initiate longs in 2 lots of 1m ATM -0.49 delta puts, simultaneously, add long in 1 lot of +0.51 delta call of 2m expiry, the payoff function of the strategy is likely to derive positive cashflows regardless of swings but more potential from the underlying spot FX moves towards downside.

The risk is limited to the extent of premium paid to buy the options.
The reward is unlimited until the expiry of the option.

Please note that the trader can still make money even if he was wrong, that means the strategy likely to derive handsome yields in premiums regardless of swings. But the spot FX has to move in the opposite direction really fast. The 1 call bought has to beat the cost of buying all the options and still bring in some profits.

Currency Strength Index: FxWirePro's hourly CAD spot index is displaying shy above 89 levels (bullish), while hourly JPY spot index was at 48 (bullish) while articulating (at 07:31 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest