FxWirePro: CAD/JPY diagonal options strips best suitable to hedge CAD’s softness after BoC’s status quo

CADJPY slides past 84.500 levels, heading towards to hit 3-months lows after a dovish statement from the Bank of Canada (policy rate unchanged at Wednesday’s meeting). Investors slashed odds of future rate hikes after the central bank noted that “there may be additional room for non-inflationary growth”. Watch out for Poloz’s scheduled appearance later today (13:35 GMT) for further cues.

Technical Glance: Technically, on a broader perspective, the consolidation phase since December 2015 in the major trend of CADJPY most likely to form head & shoulder pattern which is bearish in nature, while bears nudge price below EMAs (refer weekly plotting). However, we cannot afford to disregard the bullish attempts unless it breaches below 83.795 levels where it acts as the strong support as shown in the weekly technical plotting.

Options Trading Strategy (CADJPY): Contemplating above factors, although it is sensed that all chances of Japanese Yen may look superior over Canadian dollar in the near-term future; we advise balanced-hedging perspective but to favor slightly CAD’s depreciation through below recommendations.

We’ve been firm to hold on this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 1m at the money delta put option and simultaneously, buy at the money call options of similar expiries. It involves buying a number of ATM calls and double the number of puts. Please be noted that the option strip is more of customized version of options combination and more bearish version of the common straddle.

Huge profits achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with a downward move. Hence, any hedger or trader who believes the underlying currency is more likely to slide downside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index: FxWirePro's hourly CAD spot index is inching towards -109 levels (which is highly bearish), while hourly JPY spot index was at 35 (bullish) while articulating (at 06:46 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex