FxWirePro: Options Strips to Trade CAD/JPY Ahead of Canadian Trade Balance

Canada is lined up for the trade balance data announcements today, Canada’s merchandise trade deficit narrowed to CAD 2.90 billion in February 2019 from a downwardly revised CAD 3.09 billion in the previous month and compared with market expectations of a CAD 3.5 billion shortfall. Imports declined 1.6 percent month-over-month, led by lower purchases of gold and exports dropped 1.3 percent on lower sales of non-energy products.

Contemplating above fundamental factors, CAD quietly consolidating within range; bearish on narrowing spreads. 

Positively skewed CADJPY IVs of 3m tenors have also been signaling bearish risks, the hedgers’ interests to bids for OTM put strikes up to 79.000 levels indicating downside risks in the medium terms. Please also be noted that above technical chart indicates the major downtrend remains intact. 

Accordingly, we advocated options strips strategy to address both short-term abrupt upswings if any and the major downtrend.

We’ve been firm to hold on to this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of similar tenors. It involves buying a number of ATM call and double the number of puts. 

Please be noted that the option strip is more of a customized version of options combination and more bearish version of the common straddle. 

Considerable returns achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with a downward move. Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards in short run but major downtrend can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentrix 

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 42 levels (which is bullish), hourly JPY spot index was at 60 (bullish) while articulating at (09:10 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex