The implied volatility of ATM contracts for 1M-3M tenors of EURUSD is flashing at around 12.45%.

The risk reversals of this pair of the same duration are flashing hedging arrangements for downside risks.

Since the delta risk reversals with positive ticks creeping up gradually for next 1W expiries to signify the bulls holding firmly and for any abrupt upside risks but downside hedging arrangements over the longer period of time, we reckon the sideway trend to prolong further.

From almost last one year we've been seeing the pair oscillating within stiff sideway trend (ranging 1.1480 to 1.05 levels).

If you consider long term euro's valuations then you would come across the divergence between historic vols and implied vols as well as spot curve and risk reversals (see for HVs/IVs and spot/risk reversal relation in the diagram).

This disparity is evident majorly because in recent times bears have lined up as Euro retreated below 1.1198 levels, many turned disinterested in the decision of today’s crucial meeting of the Fed but more cautious about forward guidance in FOMC speech.

As a result, we advocate the below option strategy on speculative perspectives.

Option-trade recommendation: Naked Strangle Sale

As we foresee narrow range trend is puzzling this pair on monthly charts,

At current spot at 1.1224 the pair moving in non-directional trend and with reducing IVs as stated above, keeping these factors into consideration we would like to place below trade positions to achieve certain returns though shorting a strangle as there are could be no actions in this Fed’s decision today that could not bring in any dramatic momentum on either side and evidence drastic movement.

Thus, stay short in 2W OTM put (1.5% strike difference referring lower cap) and simultaneously short OTM call simultaneously of the same expiry (1.5% strike referring upper cap) (preferably short term for maturity is desired).

Overview: Investor ponders over the market would not be very volatile within a broader band.

Margin: Required.

Max.Returns: Limited to the two premiums received. Maximum returns for the strategy is achievable when the underlying spot FX price on expiry is trading between the OTM strikes as both the instruments have to expire worthless. So that the options trader gets to keep the entire initial credit taken as profit.

Max.Risk: Unlimited - should the market fall or rise greatly. If the market does little then the value of the position will benefit as the short positions gain when the option time value falls.