FxWirePro: No twists in EUR/CAD’s uptrend – stay firm and safe with option collars

A temporary pause in prevailing uptrend should disrupt bull sentiments, if you think Euro to spike up further against Canadian dollar, while ATM volatilities remain at 9.40%, then cover your underlying currency exposures with collars strategy exclusively on hedging grounds.

The flurry of strong bullish pattern candles have been popping up which is to be treated as a caution of continuation of upswings while leading oscillators are showing upward convergence with the price spikes. RSI (14) looks healthily converging with every price rises, it has neither approached oversold zone nor even overbought territory from last one and half year or so. So, RSI signifies the prevailing uptrend remains intact.

Here is the strategy for those who have spot FX Euro exposure at present who are concerned about a correction and wish to hedge the long spot currency position, Write deep OTM call option + hold an ITM put option (near month Call & mid month put). This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put.

Thereby, any declines in this pair would be taken care by ITM put options since the holder of the put option will have right to sell at predetermined strike price at expiry in case of European style options. Maximum return = Strike price of call - Currency spot price - net premium paid or Strike price of call - Currency spot price + net credit received on short side. Remember again, this is purely for hedging; speculators should stay away from this strategy.