Kiwi dollar gains after GDT price index that measures the change in the average price of dairy products sold at auction has improved from previous -0.4% to 0.0%. It is the major contributor to the Kiwis trade balance.

In the underlying detail, whole milk powder (WMP) prices (the biggest influence on Fonterra's farm gate milk price) halting their recent run of declines. WMP prices rose 1.9% to US$2,079/tonne. In contrast skim milk powder prices took a breather, falling 1.1% to US$1,927/tonne after rising almost 17% over the last three auctions.

OTC outlook & hedging strategy:

Since OTC markets of this pair seem to be highly volatile with the extremely bearish environment, and IVs for 1M contracts are perceived at around 19.68%. This would be a good news for the option holders contemplating the prevailing bearish environment but more number of longs in ATM delta puts would ensure the reasonable probabilities in underlying exposures.

To factor in the weakness of this pair as we could see reasonable IVs, we recommend capitalizing more on bearish signals but on the flip side ITM shorts with narrowed expiries are recommended that generates positive cash flows during higher IV times as the pair show little strength today. If it continues in a short run one can think of writing ITM puts as shown in the diagram that has reduced almost more than 50% of the hedging cost.

So, here goes the strategy this way, initiate longs in 2 lots 1M ATM -0.50 delta puts, long in 1M (1%) OTM -0.37 delta put, and simultaneously short 2 lots of 2W (1%) ITM shorts, the spread is to be executed in the ratio of 3:2.

While the theta is the sensitivity of an option’s value to the passage of time. It is usually expressed as the change in value per one day’s passage of time. One can make out the higher theta values if the underlying keeps traveling towards ITM strikes.