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FxWirePro: EUR/USD tactical positioning in options investing – Optimize convexity and volatility

The implied volatility of ATM contracts for 1M-3M expiries of this the pair is flashing at around 8.4%.

While current 1w IVs of ATM contracts of EURUSD cross for 1W expiries considerably on a higher side (almost at 10.8%).

We’ve learnt from our historic posts on IVs that the options with a higher IV cost more. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favour. If IV increases and you are holding an option, this is good. Unfortunately, if you have sold an option, it is bad. Only because a seller wants IV to shrink away so the premium can be pocketed. Please also be noted that short-dated options are less sensitive to IV, while long-dated are more sensitive.

Delta risk reversals with positive ticks creeping up gradually for next 1W expiries to signify the hedging positions are well equipped for any abrupt upside risks and downside hedging arrangements over the longer period of time.

Without oversimplifying, there are two distinct types of directional investment styles, often referred to as tactical (the 15-minute meal) and structural (the slow simmer stew) considering above IV and risk reversal indications.

Each has its own features in terms of timing and probabilities. In the same fashion, optional directional strategies can be split into two distinct groups: long gamma strategies are suitable for tactical opportunities while short gamma strategies should be favoured to trade structural scenarios.

From almost last one year we've been seeing the pair oscillating within stiff sideway trend (ranging 1.1477 to 1.05 levels).

If you consider long term euro's valuations then you would come across the convergence between spot curve and risk reversals (see spot/risk reversal relation in the diagram).

Hence, it is more advantageous to consider structures benefiting from the passage of time, and such strategies are necessarily short gamma.

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