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We had earlier traced out an inverted hammer pattern candle at 1.4058 levels which is to be considered as a caution of either probable reversal upward or continuation of upswings and now look at what has been happened. For now the pair is taking significant support at 1.4201 levels but closing basis should be considered. We believe if it holds then healthy bounce back may happen otherwise the declines until 1.3979is possible (i.e. previous channel distance).
If you think Euro to spike up against Canadian dollar, then cover your underlying currency exposures with collars strategy. This strategy is for those who have Euro exposure at present who are concerned about a correction and wish to hedge the long spot currency position. So, how do you do that? the hedger takes following positions to construct this strategy:
While holding spot FX positions, Write an deep OTM call option + hold an ITM put option (near month Call & mid month put).
Thereby, even though you would not expect a steep upswings in near future, premiums on deep OTM contracts assures certain returns. This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put. Hence, 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.
