FxWirePro: EUR/JPY debit gamma spreads ensure risk reward profile for risk averse; but binary calls for intraday trade

Option Currency Hedging: Debit Put spreads

No doubt upswings are rallying on this pair but any abrupt swings may turn adversely as we think the current uptrend is not that robust and long lasting, so we've tailored our formulation of strategies as the risk appetite varies from different investors to different traders.

The naked at the money put option with 7 days expiry was highly sensitive to moves in the underlying exchange rate of EUR/JPY when gamma was at around 0.31 and 1W ATM volatility is perceived at 9% and it is likely to increase in long run (for next 6 months to 1 year span). Because in the sensitivity table gamma shows how much the delta will shift for a corresponding underlying rate moves by 1%. With reducing volatility gamma adds to the risk and reward profile for both holders and writers.

Thus, on a long term hedging perspective, using gamma factor in order to neutralize volatility factor, debit gamma put spreads are advocated so as to reduce the sensitivity and focus on hedging motive. Selling an Out-Of-The-Money put option is recommended to reduce the cost of hedging by financing long position in buying In-The-Money Puts.