FxWirePro: Improve odds on backspreads - Capitalize on GBP/AUD upswings to employ shorts

We reckon this pair has shown weakness in recent past, bulls seemed to have been exhausted by giving up the previous rallies even though some left over price bounces can be extended in near term (see technical chart for bulls struggle).

To substantiate these reversal stances, some sort of bearish patterns and leading oscillators are also converging downwards with current falling price fluctuations; you can figure this out from monthly chart in our earlier post.

As a result, we recommend capitalizing on employing ITM short puts matching with ATM longs to construct long term backspreads at -0.25 delta.

Let's shed some light on some guiding principles for evaluating and mitigating risk that traders may want to use to modify their inventive approach:

• Use as shallow a ratio as possible.
  
  
• Be sure that a large move in the underlying (targets set at 2.0343 levels) can be withstood without losing any money. This should be of greater concern than doing the spread for a credit.
  
  
• Stress-test the spread, assuming that a move will occur any moment.

When trying to assess how a spread may perform, look at the spreads of deeper in-the-money options for an indication of relative option prices. (For a demonstrated purpose we've used 1% ITM instruments and used only 7 days on long side, in real times longer expiries on ATM contracts.

Should a what-if analysis reveal that traders will lose an uncomfortable amount of money, they should either flatten out their ratio, wait for another opportunity in the cycle, or look for a spread in another pair.