FxWirePro: GBP/JPY bearish sentiments mounting – prefer BPS to arrest downswings

On monthly chart, the formation of hanging man pattern candle on peaks of uptrend at around 193.456 levels. This would reveal a medium term downtrend direction. Overall pattern on the pair fixes it bearish view for a 183.125 and it's been a support breach as well at around 188.575. In addition to that huge volumes are popping up to show bearish sentiments, while leading oscillators (RSI & slow stochastic) show convergence with dipping prices at current levels.

In order to arrest potential downside risk, debit put spreads are advocated as the selling indications are piling up on monthly and weekly graphs. So buying (1%) in the money -0.49 delta put and to reduce the cost of hedging by financing this long position, selling an out of the money put option is recommended.

Why bear put spread: If the trader or investor believes that they are in a moderately bearish environment, they will use this strategy to take advantage of a decrease in stock price.

Advantage: This allows the trader or investor to put into place a double hedge. By receiving the premium from writing the put with the lower strike price, they offset the price they paid for the put with the higher strike price.

Risk/Reward profile: The risk with this strategy is that if GBPJPY price rallies above the strike price, the whole amount of the net cash outflow, or net debit paid for the bear put spread, will be lost. The reward accrues as the pair price declines.