FxWirePro: EUR/AUD breaks-out trendline support as anticipated; hedging perspective from option strips to straps

Technical Glance:

As anticipated the pair breached trendline support at 1.4677 with an "inverted hammer" formation yesterday. After a downtrend, the formation of an inverted hammer is bullish because prices have been sluggish to their move towards downward by increasing significantly during the day.

Currency Option Strategy:

We now want to square off the positions in strips, book the profits and for now convert the same into strap on hedging grounds. Unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

So, Buy 15D At-The-Money delta put option and simultaneously short 2 lots of 15D At-The-Money delta call options.

It involves buying a number of ATM puts and double the number of calls. The strap is more of customized version combination and more bullish version of the common straddle.

Hence, any hedger or trader who believes the underlying currency is more likely to surge upside can go for this strategy.

Maximum returns can be achievable when the underlying exchange rate makes a strong move either upwards or downwards at expiration but with greater gains to be made with an upward move. Cost of hedging would be Net Premium Paid + brokerage/commission paid.