FxWirePro: EUR/USD OTC hedging sensitivities in sync with the bearish scenarios and projections – Options strips for both smart hedging and trading

Bearish EURUSD scenarios (likely to slide upto 1.14):

1) Growth fails to rebound above 2%;

2) EUR appreciation and/or sluggish core CPI delays ECB policy normalization

3) Eventual repatriation by US corporates.

Bullish EURUSD scenarios:

1) The growth rebounds to 3% by mid-2018;

2) ECB becomes more comfortable with progress on wages and core inflation

OTC outlook:

The positively skewed IVs of 3m tenor signify the hedging interest of bearish risks while mounting bearish risk sentiment is substantiated by rising risk reversal numbers.

Contemplating above-stated driving forces and OTC indications as shown above, accordingly options strips strategy is already advocated about a fortnight ago on hedging grounds. The options strips strategy which contains 3 legs need to be maintained with a view to arresting price downside risks.

Option Strategy: Options Strips
Combination ratio: (2:1)

Rationale: Considering the bearish technical environment in the recent past and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers.

The execution: 

Go long in 2 lots of EURUSD at the money -0.49 delta put options of 1M tenors, go long 1M at the money +0.51 delta call option simultaneously.

Margin requirement: No.

Description: Traders expect increased volatility without taking a view on any particular direction. A strategy usually utilized over significant economic data events and other political events.

Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).

Please be noted that the strategy likely to fetch positive cashflows regardless of the swings with more potential on the downside. Hence, one can deploy this options strategy on hedging as well as speculative grounds.

Currency Strength Index: FxWirePro's hourly EUR spot index is displaying shy above 53 levels (which is bullish). While hourly USD spot index was inching towards -123 (bearish) while articulating (at 07:25 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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