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Please be noted that the IVs of EURJPY is spiking highest among G10 FX space and risk reversals have been indicating bearish risks in short run and has been neutral in the long run. A Risk Reversal is an individually tailored hedging solution, structured to meet your needs.
Technically, this pair has broken a stiff resistance of 128.875 levels, current prices spike well above SMAs. On a broader perspective, bull swings seem to be gaining traction above 50% Fibonacci levels, as a result, rallies are heading towards one and a half month highs in the consolidation phase with bullish EMA crossover.
We think the pairs such as EURJPY are blowing IVs on higher levels in G10 OTC FX space that pops up with rising IVs above 8.5% for 1-month and 9.36% for 1m and 3m tenors respectively (highest among the space) having significance in economic drivers that propels this currency pair to anywhere.
We think the same HY IVs with longer tenors are conducive and justifiable for option holders as there are series of considerable economic events lined up going forward.
Well, in order to arrest this upside risk that is lingering in intermediate trend and prevailing uptrend, we recommend diagonal option strip that favors underlying spot’s upside bias in short run and mitigates bearish risks in long term.
So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 3M ATM -0.49 delta puts and 1 lot of ATM 0.51 delta calls of 1m expiries.
Since the spikes are likely in near term and downswings in longer term seem to be dubious as per the signals generated by risk reversals as well as from IV skews, EURJPY option straps strategy should take care of both upswings and downswings simultaneously, even if the BoJ surprises with the forecasters, and the strategy is likely to derive handsome returns on the downside and certain yields regardless of swings on either side but with more potential on downside.
