FxWirePro: CAD to shine against AUD – drift in IV monitored by backspreads, yields of holders on longs underway

When PRBS was advised on 23^rd, AUD dropped from 0.9405 to the lows of 0.9259 (you can observe that from above EOD charts), well... it's not a magic, a sheer deal of analysis. With more downside potential currently the spot fx AUDCAD is trading at 0.9311 levels. Traders tend to view the put ratio backspread (PRBS) as a bear strategy, because it employs puts. However, it is actually a volatility strategy.

Refer: http://www.econotimes.com/FxWirePro-AUD-CAD-put-backspreads-not-only-a-bearish-weapon-but-a-volatility-measure-92807

Referring our previous post may have convinced you what has happened with ITM shorts with shorter maturities (let's say 3 day or 5 day).

With IV of ATM contracts of this month expiry being marginally inching lower (at around 9.24%), compare this with IV when we advised this strategy. Options with a higher IV cost more (which means ITM shorting would have fetched you more premiums then). This is intuitive due to the higher likelihood of the market 'swinging' in your favour. If IV increases and you have sold an option, it is bad. A seller wants IV to fall so the premium falls which has happened in our case. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.

So our ITM shorts with shorter expiries have pretty much achieved their objectives, now is the time for longs on 2 lots of At-The-Money -0.50 delta puts and simultaneously expect the underlying currency AUDCAD to make a large move on the downside. We have fundamental reasoning too for this anticipation of CAD's appreciation against AUD, we would come up with that in our upcoming posts.