As stated in our previous article on technicals, this pair has been oscillating between 80.523 and 78.252 levels with reduced selling momentum but long term trend seems to be intact and leading and lagging indicators still favouring bears on monthly charts.

While IVs of ATM contracts of 1w and 1m tenors are progressively increasing and this has been justified by historical volatilities in spot FX fluctuations (see big real body candles on monthly technical charts).

The current ATM IVs of are flashing at 7.37% and 10.59% for 1w tenor.

Traders tend to view the put ratio back spread as a bear strategy, because it employs puts. But, longs on backspread actually needs volatility. The implied volatility of 1w ATM contract is at 10.59% and it is quite higher side when long term trend is bearish and spikes in previous rallies for short term which is good sign for option writers.

Traders tend to view the put ratio back spread as a bear strategy, because it employs puts. However, it is actually a volatility strategy.

Options with a higher IV cost more. This is intuitive due to the higher likelihood of the market 'swinging' in your favour. If IV increases and you are holding an option, this is good. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.  

While on 6 Days To Expiry (6DTE) gamma of OTM put strikes have been steadily moving with stagnant IVs, which means sensitivity in the rate of change in delta would also be considerable. So, one can utilize such productive instruments to optimize the functionality of longs in the strategy.

As we expect the underlying currency exchange rate of AUDJPY to make a larger move on the downside. As shown in the figure purchase 1M 2 lots of At-The-Money -0.52 delta puts and sell 1W one lot of (1%) In-The-Money put option.

So far we all know that the position uses long and short puts in the ratio, such as 2:1 or 3:2 and so on to maximize returns depending upon risk appetite and returns expectations.

Based on volatility and time decay, the strategy is a "price neutral" approach to options, and one that makes a lot of sense.