If anyone thinks Euro to spike up further against Canadian dollar, then cover your underlying currency exposures with collars strategy exclusively on hedging grounds.
An inverted hammer pattern candle appeared at 1.4058 levels which is to be treated as a caution of continuation of upswings with leading oscillators are showing convergence with the price spikes. RSI (14) looks healthily converging with every price rises, it has neither approached oversold zone nor even overbought territory from last one and half month or so. So, RSI signifies the prevailing uptrend remains intact.
So this strategy is for those who have Euro exposure at present who are concerned about a slight correction but further gains are expected and wish to hedge the long spot currency position.
How do you do that? Well the hedger takes following positions constructs this strategy: Write deep OTM call option + hold an ITM put option (near month Call & mid month put).
This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put. Thereby, any declines in this pair would be taken care by ITM put options since the holder of the put option will have right to sell at predetermined strike price at expiry in case of European style options.
Maximum return = Strike price of call - Currency spot price - net premium paid.
Or
Strike price of call - Currency spot price + net credit received on short side.
Remember again, this is purely for hedging; speculators should stay away from this strategy.
