FX OTC outlook:

Since 1W EURJPY implied volatility has been declined massively on the back of BOJ’s shift in its monetary policy, slight bullish swings were observed today in spot FX (day highs at 114.395), but collapsed again to the current 112.701 levels. By that we mean both intermediate and major bear trend remains intact, as a result, we recommend a short vega strategy as follows via option strategy.

Risk reversals have been mounting to extreme bearish bias in these tenors.

Why to hedge EURJPY spot FX risks:

Technically, EURJPY continued sensing bearish pressures today despite upswings after testing stiff resistance at 21DMA, both leading as well as lagging indicators converge for downside risks in the long run.

Implied volatility skews of 3m tenor have been positively skewed to the OTM put strikes that signify the hedgers' interests for further downside risks.

We think current macro situations lead the central banks in both territory to almost defer policy actions, but manipulative statements on monetary policy outcome may keep EURJPY at stake.

Hedging Framework:

So, Buy EURJPY put ladder strikes (1% ITM: ATM: 1% OTM)

Spread ratio: 1:2

So, go long in 3m (1%) ITM +0.65 delta put and simultaneously short in 2 lots of puts (i.e. 1 ATM and (1%) OTM put) with shorter expiries (per say 1W expiries) and positive theta values.

Since 1W implied volatility has collapsed and likely to shrink away again when risk reversals are bearish comparatively to 1-3M expiries which is good for option writers in next 1 week,

Thereby, short premiums finances the long positions, capitalize on upswings and hedges the downside risks in spot FX with reduced or no hedging cost.