FxWirePro: Combination of ATM/ITM strikes to optimize AUD/USD put ratio back spread strategy with attractive risk/reward ratio

Using rising IVs of longer tenors coupled with the bearish neutral risk reversal numbers, while positively skewed IVs on 3m ATM put strikes signify the hedging sentiments for bearish risks upto OTM strikes of 0.7450, ATM strikes coupled with theta shorts in ITM put on time decay advantage would be a wise combination as the spot FX market reckons the price has downside potential for large movement in the days to come which is resulting option holders’ on competitive advantage.

Without disregarding the Fed’s further rate hiking cycle in 2018, the bearish stance of the pair has been substantiated by technical indications (as stated in our recent post, refer our technical section) and positively skewed IVs of 3m tenors which is an opportunity for put longs in long-term as the US central bank likely to continue hiking phase.

Accordingly, we had advocated put ratio back spreads a couple of days ago, wherein short leg is functioning as the underlying spot FX keeps spiking.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price rallies by bidding 3m theta shorts, 3m risks reversals to optimally utilize Vega longs.

On hedging grounds, fresh Vega longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way: Short 3m (1%) ITM put option, simultaneously, go long in 2 lots of vega long in 3m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in short run and bearish risks in long run by vega longs. One can make out from the payoff nutshell as to why do we advocate this ATM and OTM combinations.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 121 levels (which is bullish). Hourly USD spot index was at shy above -79 (bearish) while articulating (at 14:03 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