FxWirePro: EUR/USD diagonal options strips for mounting risk-off and bearish hedging sentiments

The global equity markets especially in the Far East have been in risk-off mode, following the cut by Apple Inc. to their revenue outlook. The move is said to be partly responsible for triggering a wave of risk aversion in foreign exchange markets, prompting heavy selling of the Australian dollar and Turkish lira against the yen, which in thin liquidity conditions delivered wild swings in currency markets overnight.

While the euro is not a safe haven, so as a result it rightly suffers against USD and JPY in times of risk-off but is standing up quite well compared with most other G10 currencies. 

Well, there have been many admired FX options trading strategies among FX investors, such as, the carry trade or long-short momentum trades that fetches luring yields during “risk on” “risk off scenarios. 

FX Derivatives Strategy (EURUSD): Options Strips
Combination ratio: (2:1), spot reference: 1.1384

Rationale: You could easily make out that EURUSD skews have been signalling downside risks in 3m tenors that signifies hedgers interest in the OTM put options. 

To substantiate these indications, the RRs for negative bids in the 3m coupled with the above-stated risk off sentiments indicate the directional trading strategies.

Contemplating the prevailing bearish technical environment (in long-term) and most importantly, the positively skewed IVs in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with the bearish risk reversal numbers.

The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors, go long 1m at the money +0.51 delta call option simultaneously.

The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside. 

Alternatively, shorting futures of mid-month tenors are advocated with a view of arresting further potential slumps. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: sentrix, saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -31 levels (which is mildly bearish), while hourly USD spot index was at 37 (mildly bullish) while articulating (at 10:01 GMT). 

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