FxWirePro: EUR/USD glides in sideways amid tug of war between bulls and bears – Put ratio spread to trade using 1w jerking IVs

Last week’s upswings of EURUSD could not be sustained; these upswings were snapped at 1.1279 levels. The pair has started losing in its price again to trade at the current 1.1220 levels.

Currently, testing supports at 1.1210 levels (7DMA, 10th highs), but likely to break that exposes more bearish targets.

RSI (14) on daily chart diverging to the previous rallies and being bearish bias (Currently, daily RSI trending below at 56 right 70 levels). This overbought environment has resulted in the selling momentum when prices touched 1.1320 by taking the computation of last 14 day periods the magnitude of recent gains to recent losses in an attempt to signify the overbought pressures.

While %D crossover on daily on the slow stochastic curve with every price dips signals selling momentum is rising (Currently, %D line trending below 81, while %K line below 70).

The non-directional pattern is persisting from more than last one year or so, but some bullish neutral indications are observed, slight bearish pressures can be seen in the months to come, hence, there is a massive collapse in implied volatilities as well an OTC FX market.

Hence, in long run, we still project below cyclical lows of 1.10 but between the range of 1.08-1.09 by the Q2'2016 end.

Overall, the neutral phase remains intact and only a clear break out of the expected 1.1020/1.1260 sideway trading range would indicate the start of a sustained directional move.

Option Trading Tips:

The current IVs of 1W ATM contracts of EURUSD are crawling reluctantly a tad below 5.75% 9the least among G7 FX space), a massive drop from recent times, as a result option premiums likely to shrink away on account of time decay.

Looking at the above technical reasoning and OTC outlook, the put ratio spread is a neutral strategy in options trading that involves buying a number of  put option and selling more put options (preferably in the ratio of 1:2) and expiration date at a different exercise price.

It is the limited returns and unlimited risk options trading strategy that is taken when the options trader thinks that the underlying spot FX would experience little volatility in the near term.