FxWirePro: Quick run-through on intricacies of options straddles to sync with EUR/USD OTC indications and technical trend

The FX market seems to be gripped by springtime lethargy. Even though there are some plausible moves, such as a weaker euro following some cautious comments by ECB officials or the dollar easing slightly in reaction to disappointing US consumer confidence yesterday afternoon. But on the whole moves just before Easter seem listless and can mainly be explained by low liquidity or technical factors such as the month or quarter end. Following the major fears of a global trade war nerves have calmed down as the risks of such a development have fallen considerably now that President Donald Trump has given in towards numerous trade partners with the exception of China.

Technically, as stated in our previous post, the underlying FX pair EURUSD has been oscillating between a tight range of 12560 and 1.2150 levels even though the intermediate trend has been bullish, while the flurry of bearish indications is lingering around the corner.

Well, all these fundamental and technical developments are factored in EURUSD OTC markets.

Option Strategy: Options straddle
Combination ratio: (1:1)

Rationale: Contemplating above mentioned technical environment, and ATM implied volatilities of 1m expiries are below 7% which is on the lower side among G7 currency segment (2nd least after EURGBP) and hence, likely bounce back.

Let’s glance at risk reversals that indicate the shift in the bullish hedging sentiments in next 1m time. Whereas hedging sentiments seem well balanced on either side if you have to glance through the sensitivity tool, the positively skewed IVs are stretched on both OTM calls and OTM puts in 1m timeframes.

In addition to that, let's glance on OTM strikes, %change in premiums and %probabilities in hitting these strikes on expiration that keeps us eye on shorting expensive calls with shorter expiries in conjunction with ATM straddles.

Based on this rationale, cautious hedgers can initiate the below-stated options strategy. In order to arrest both this upside and downside risks that are lingering in short-term trend, we recommend deploying options straddle strategy.

The execution: 

Go long in EURUSD 1M at the money delta put, go long 1M at the money delta call and simultaneously.

Margin requirement: No.

Description: Trade the expectation of increased volatility without taking a view on any particular direction. A strategy usually utilized over significant economic data events and other political events.

Profit: The profitability amplifies as the underlying spot FX of EURUSD rises or tumbles, yields would be unlimited as you can see the payoff structures.

Loss:  The maximum loss is to extent of the premium paid.

Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).

Currency Strength Index: FxWirePro's hourly EUR spot index is displaying shy above 115 levels (which is bullish). While hourly USD spot index was inching towards 36 (mildly bullish) while articulating (at 08:59 GMT).

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

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