USDKRW has been factoring in from last two days after the BoK astonishes the market by making an unexpected 25bp rate cut at its June monetary policy meeting.

But KRW gained from a last week or so as the cut appears to be explained by the weakness in the May domestic demand data and the deterioration in the near-term growth outlook.

We would like to place the below option strategy both on hedging as well as speculative grounds as the expectation for one more 25bp rate cut toward 1.0% in Q3 this year, as a one-off cut would increase the chances of a rise in market interest rates.

FX Option Trading via Debit Call Spreads (DCS) of USDKRW:

Favour optionality to directional trades. We are inclined to position for a partial retracement of the down move through call spreads, as calling the bottom is difficult and adding directional spot exposure is risky at the moment.

Call spreads are preferred to vanilla structures given elevated skew and favourable cost reduction.

Buy USD/KRW 2M call spread with strikes of 1,177-1,155 for a net debit.

The net delta of the position should be around 36 (1,177 strike = 68 delta, 1,155strike = 32 delta) and selling the upper leg call (OTM strikes) likely to reduce the cost of the ITM call by almost close to 25-30%.

Maximum gain is achievable when underlying spot FX move above OTM strike with ideal risk-reward.

By shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets.