FxWirePro: Is it U turn on AUD/CAD? Stay firm with shorts on short put ladder

We had advocated short put ladder strategy in our earlier post, now short sides seem to function as per our expectations as the pair rallies onto 0.9519 levels, so that those shorts with smaller expiries, let's 3D, 5D or 7D fetch a certain yields.

It is seen that slow stochastic curves went above 80 levels but no signs of %D crossover which signifies the selling pressures and in order to boost this view RSI oscillator is positively converging with price spikes which suggest prevailing short term rallies may prolong upto above stated levels.

If the below strategy was executed when we advised this a fortnight ago, the premiums from deep out of the money puts with shorter expiry would have been certain profits. We had stated that the current short term uptrend would prolong maximum up to 0.9500 levels so that long side would not get disrupted and after that anytime bearish call may be generated.

Currency Option Strategy: AUD/CAD

Buy 1M ATM -0.49 delta put + Sell 7D (1%) OTM put option + Sell another 7D deep (2%) OTM put option, all contracts with similar expiry. So, in summary, if the pair falls below the lower (buy) strike, we make potentially uncapped profit until the pair reaches bottom; if it rises to anywhere between the middle and upper (short) strikes, we make our maximum loss.

We are better off trading strategy as the implied volatility of ATM contracts of this pair is around 13.76% in order to counter the effects of time decay. Delta of strategy is negative at the start. As such, its value will increase as the price of the AUDCAD decreases.

The extra leg also ensures that we may have two break even points. Vega of this spread is negative and will therefore lose value as implied volatility rises and gains value as implied volatility drops. As such, it is highly disadvantageous to use a long put ladder spread in periods of rising implied volatility prior to expiration.