FxWirePro: Certain returns on deep OTM puts in AUD/CAD put ladder – use upswings for new positions, bearish trend to resume

Technical Roundup:

Those who've constructed the below strategy when we advised this last week, the premiums from deep out of the money puts with shorter expiry would have been certain profits. The downtrend that has been gradually prolonging and bearish candles on intraday charts are popping up every now and then with abundant volume confirmation. While we've seen %D crossover above 80 levels late yesterday which signifies the selling pressures and in order to boost this view RSI oscillator is converging with price slumps which suggests prevailing downtrend following right valuations.

Currency Option Strategy: AUD/CAD

Buy 1M ATM -0.49 delta put + Sell 7D (1%) OTM put option + Sell another 7D deep (2%) OTM put option, all contracts with similar expiry.

We are better off trading strategy as the implied volatility of ATM contracts of this pair is around 12.68% in order to counter the effects of time decay. Delta of strategy is negative at the start. As such, its value will increase as the price of the AUDCAD decreases. So, in summary, if the pair falls below the lower (buy) strike, we make potentially uncapped profit until the pair reaches bottom; if it rises to anywhere between the middle and upper (short) strikes, we make our maximum loss. The extra leg also ensures that we may have two break even points. Vega of this spread is negative and will therefore lose value as implied volatility rises and gains value as implied volatility drops. As such, it is highly disadvantageous to use a long put ladder spread in periods of rising implied volatility prior to expiration.