FxWirePro: Don’t fail to spot AUD/NZD spikes to deploy shorts in 2:1 “Put Ratio Back Spreads” on low IVs – Dips or spikes? Strategy to hedge either way

First and foremost thing that we want to emphasize is that the momentum remains negative for this pair, we reckon the next bearish target to hit 1.0235 levels (Sept’16 low).

AUDNZD 1-3 month: Foresee potential below 1.0350 upto 1.0235 levels in medium terms. Higher to 1.0425, mainly for valuation reasons. The cross remains well below fair value estimates implied by interest rates, commodity prices, and risk sentiment. However, we acknowledge Australia’s AAA downgrade risk, any such action likely to delay any return towards fair value during the next few months.

OTC updates and hedging Framework:

Please be noted that the implied volatility of at the money contracts of this APAC pair has been dropped below 7.5% for 2w expiry and shy above 7.6% for 1m tenors, while 1m vega are signifying the hedgers’ interests in downside risks.

So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings in short run as the lower implied vols are conducive for option writers.

With GDT index and Aussie trade balance lined up for the announcement that are the major data focus for this week.

Hence, AUDNZD's lower IVs with vega’s interest on OTM put strikes could be interpreted as the option holder’s opportunity in the medium run.

Weighing up above aspects, we eye on loading up with fresh 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 2w (1.5%) ITM put option as the underlying spot likely to spike mildly, simultaneously, go long in 1 lot of long in 1m ATM +0.49 delta put options and 1 lot of (1%) OTM -0.37 delta put of 2m expiry.