FxWirePro: Long ITM put to tackle momentary NZD short covering trend – PRBS to hedge as NZD/USD 2m IVs still bearish skewed ahead of RBNZ

NZDUSD speculators have begun paring extreme short positions, indicating NZD upside potential near-term. However, there is major event risk to navigate during the next week. 

The catalyst for the reduction in short positions has been the improved mood in risky asset markets over the past two weeks (e.g. equities higher, US dollar lower). Today’s strong NZ GDP data will add to arguments for exiting shorts, and we would not be surprised to see the NZD trading at 0.6725 during the week ahead. 

OTC Outlook and Options Strategy (NZDUSD): 

Most importantly, OTC market hedging sentiments still favor bears as the positively skewed IVs of 2m tenors signify the hedgers’ interests for downside risks. The bids have stretched for OTM put strikes upto 0.6450 levels (above nutshell). 

Accordingly, we advocate 2m (1%) in the money -0.79 delta put options, the rationale for choosing such derivative instrument is that the deep in the money call with a very strong delta would move in tandem with the underlying move. Deep in the money call with a very strong delta will move in tandem with the underlying.

Considering ongoing price rallies of kiwi dollar, it is wise to capitalize on such deceptive rallies and execute below options strategy:

Add longs in 2 lots of 2m (1%) in the money delta put options and short 2w (1%) out of the money put options.Thereby, the strategy addresses both upswings that are prevailing in short run and bearish risks in the long run by delta longs.

Currency Strength Index: FxWirePro's hourly NZD is inching at 155 (which is bullish), USD spot index is flashing at -99 levels (which is bearish), while articulating (at 10:59 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex