FxWirePro: EUR/CAD uptrend continuation signal from inverted hammer; collars to hedge uptrend participation

It is traced out that inverted hammer pattern candle occurred at 1.4058 levels which is to be considered as a caution of either probable reversal upward or continuation of upswings. It is quite important to note that the inverted hammer pattern is a warning of potential price change, not a signal, in and of itself, to buy.

In addition to that 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.

While another leading oscillator (stochastic) hints us the overbought heaviness the moment pair hits 1.4119 levels as the %D line crossover is seen above 80 levels.

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 and are concerned about a correction and wish to hedge the long spot currency position.

How do you do that? Well the hedger takes following positions constructs this strategy:

Write an OTM call option + hold an ITM put option (near month Call & mid month put).

How does it arrest downside risks: 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.