FxWirePro: Deploy EUR/AUD diagonal call ladder spread to deal with both bears in short run and long-term upside risks

OTC outlook and hedging strategy (EURAUD):

OTC Outlook and Options Strategy: In the case of optionality, the skews of 1m implied volatilities are projected to spike above the current realized, while the positively skewed IVs indicate bidding for hedging upside risks in the underlying spot (upto 1.56 levels).

Technically, the risk is essentially pricing in the bearish case in the short-medium trend but the major uptrend remains intact, as it is linked to the possibility of volatile Aussie spikes. We articulate the euro’s technical trend against the Aussie dollar in our recent post (refer the same in our technical analysis section).

Thus, contemplating all the above underlying factors of EURAUD, we like being short vol in short run, selling that premium conditionally on a pay-off benefiting from a lower spot.

At spot reference: 1.5353, prefer a ladder to a call spread ratio as we expect slumps to continue in short run and limited spot appreciation and topside volatility, accordingly buying a 1m call ladder are recommended. Buy 1 ITM Call of 1m tenor, simultaneously stay short in 2w 1 ATM Call and Sell 1 OTM Call of positive thetas (strikes 1.5225/spot/1.5435).

That structure improves the odds compared to a call spread ratio as the maximum and constant profit zone is reached over a range instead of a single spot level.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -30 (which is bearish), while hourly AUD spot index was at -7 (neutral) while articulating (at 09:10 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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