FxWirePro: Overpriced 1w IVs, interest rates differentials keep NZD/USD call writers on upper hand

1w implied volatilities are flashing at 12.61%, while ATM calls of this time frame are priced at 15.38% more than Net Present Value. Hence, these call options are deemed as overpriced in prevailing bearish environment.

Expensive implied volatility and spot within a channel Implied volatility is elevated compared to realised volatility (see above graph), suggesting a structure selling it.

The downside skew is not sufficiently elevated to finance a put via low strikes (a put spread-like structure), but the negative skew is enough to obtain an attractive discount via a downside knock-out.

Such a barrier is appropriate for trading moderate NZDUSD downside, keeping in mind that the spot has been trapped within a bullish channel since the start of the year and that 0.70 is below the support line.

NZDUSD’s appreciation has occurred against the direction of interest rate differentials for months, and the disconnection recently widened with the latest bout of currency strength (see above Graph).

Hence, we think call writing could also be beneficial as IV skewness is conducive for prevailing bearish environment.