FxWirePro: Falling wedge on AUD/JPY – BPS hedges and straddle shorting speculates

Both EOD and weekly graphs signal sideway to slightly bearish trend, the pair is currently testing a crucial support at around 91.678 levels on daily charts with the likely formation of falling wedge.

More importantly a Doji pattern candles occurred back to back. The occurrence of Doji this stage to signifies weakness in this pair.

Leading oscillators like RSI and slow stochastic curves have been stagnant but converging according to the minor price dips and rises, we reckon straddle shorts for short term speculation are best suitable at this point.

Hence, Short ATM put and ATM call of the same expiry with positive Theta value (preferably short term for maturity is desired).

Maximum returns for the short straddle is achieved when the EUR/JPY price on expiry is trading at around 91.630 levels only as both the instruments have to wipe off worthless. So that the options trader gets to keep the entire initial credit taken as profit.

But on hedging ground and with the above technical reasoning, we recommend arresting further downside risks of this pair by hedging through Put Ratio Back Spread.

Expect the underlying currency exchange rate of AUDJPY to make a larger move on the downside.

So, purchase 1M 2 lots of At-The-Money -0.52 delta puts and sell 1M one lot of (1%) In-The-Money put option. (Usually in the ratio of 2:1 or 3:2). The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit. The delta of combined positions should be around -0.38 with slightly negative theta value.