FxWirePro: Deploy EUR/AUD option strips bidding well-balanced IV skews on RBA’s status quo

RBA monetary policy statement remains unchanged, key rate is at 1.50%.

Australia’s strong trade surpluses reinforce the positive story from the commodity price up trend since July, lifting some of the US-China trade war risk premium. Upbeat RBA outlook also helps; scope for a test of 0.7350 - 0.7400 near-term. However, relentless grind in yield spreads favouring USD should cap; back to 0.72 by year-end.

With the RBA is expected to be on hold for the foreseeable future short-maturity interest rates are well anchored. 3yr swap rates have been in a 2.05% – 2.35% range throughout 2018, and we would not expect that range to shift over the next few months. Longer maturity rates will largely follow US rates directionally, although divergent monetary policy in the two countries will continue to see AU swap rates remain below their US counterparts. 

OTC outlook and Options Strategy: 

Most importantly, please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 1m tenors are signifying more hedging interests in both bullish and bearish risks. The bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike upto 1.5750 levels and bids for OTM puts show 1.53 levels.

Contemplating fundamental, technical and OTC factors, it is sensed that all chances of Aussie dollar may look superior over Euro in medium term future; we advise to hedge the Euro’s depreciation over AUD 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 at the money -0.49 delta put option of 1m tenor and simultaneously, buy at the money call option of similar expiries. It involves buying a number of ATM puts and double the number of calls. The option strip is more of customized version combination and more bearish version of the common straddle. 

Huge profits achievable with the strip strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with 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 EUR spot index has shown 8 (which is absolutely neutral), while AUD is flashing at -150 (highly bearish), while articulating at 05:15 GMT. 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex