The Reserve Bank of Australia released its June meeting minutes that provided the same message the bank delivered in its post-meeting statement.

It implied just a slight easing bias. Indeed, the strong economic activity data, especially the first quarter GDP report, has countered certain worries that were raised by the subdued inflation report in Q1. So, momentary gains in AUD are anticipated as a result.

Technical glimpse: This pair has been oscillating between 80.595 and 78.284 levels but last week it has broken below lower levels of 78.284 and on the contrary as buying momentum is increased ever since there was a formation of inverted hammer pattern, the rallies would be viewed as better shorting opportunities for option writers

Since the long term bear trend seems to be intact as you can see the convincing volumes and technical indicators favoring bears on monthly charts.

Hedging Framework:

The current IVs of ATM contracts are at 24.16%, 23.16% of 10D expiry and 17.73% for 1m tenors.

We kept urging that PRBS (Put Ratio Back Spread) is actually a volatility strategy but the traders tend to perceive the put ratio back spread as a bearish strategy because it employs more longs in puts.

The implied volatility of 1M ATM put contract of above 17% is considerably quite higher side when long-term trend is bearish and spikes in on-going rallies for the short term which is a good sign for option writers.

It is also priceless to note that options with a higher IV cost more. This is intuitive due to the higher likelihood of the market 'swinging' in your favor. If IV increases and you are holding an option, this is good because Vega would be sensitive to an option’s value to a little change in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.

Vega would normally be larger in options which have longer tenors until expiry, and it is likely to fall as the option approaches expiry. This is because an increase in IV is more beneficial for a longer term option than for an option that will expire in the next 10 minutes.

As we expect the underlying currency exchange rate of AUDJPY to inch higher in short run and make a larger move on the downside in long run it is advisable to 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.