FxWirePro: Gamma spreads for AUD export payables that stuck in IV riddle

The downside risk in AUD against USD is anticipated if the Fed's rate decision seems to be is in line with the Yellen's hints after she sent strong indications that US economic conditions are likely to justify an interest rate hike at some point this year. But Aussie import prices QoQ are improved by 1.4% which is in line with forecasts.

For Australian exporters who have their receivable exposures in AUD, we advocate buying ATM (At The Money) AUDUSD put options.

As the risk appetite varies from different investors to different traders, we've customized our formulation of strategies for such varied circumstances. Prevailing implied volatility rates for AUD/USD ATM 1M contracts is 13% and 11.74% for 1W contracts.

When the above naked put option was highly sensitive to moves in the underlying exchange rate of AUD/USD when gamma was at around 0.22. We think it adds to the risk and reward profile for both holders and writers.

Thus, on a hedging perspective, debit gamma put spreads are advocated so as to reduce the sensitivity and focus on hedging motive. Selling an Out-Of-The-Money put option is recommended to reduce the cost of hedging by financing long position in buying In-The-Money Puts as the selling indications are piling up on weekly graph. So, buy 15D (1%) In-The-Money 0.15 gamma put option and short 15D (-1%) Out-Of-The-Money put option for net debit.