Ahead of the central banks’ monetary policy reviews this week, we reckon both Fed and Swiss central banks are likely to maintain “status Quo” in its monetary policy, rates likely to remain unchanged at this meeting.

Having said that, the SNB has long since been concerned about the Swiss franc being in demand in connection with the Brexit referendum.

OTC Outlook & Hedging Framework: Short Put Ladder

The current ATM IVs of this pair is at 11.59% and is likely to spike off to 13.24% in 1m tenors that are in sync with increased in negative risk reversals in the long run, thus to address both short and medium term trend we recommend deploying short put ladder spreads.

So here goes the strategy that contains proportionately less number of shorts and more longs which would take care of potential slumps as the pair is likely to pick up IVs in medium run (use all European style options),

Stay short in ITM put with shorter expiry since implied volatility is stable when risk reversals are bearish-neutral comparing to 1-3M expiries which is good for option writers in next 1 week,

Thereafter, go long in 2 lots of ATM and OTM put with longer expiry (per say 1-2M expiries depending on your trading requirement and risk appetite) and simultaneously short 1W ITM puts with positive theta values.

As shown in the diagram, please be noted that the strategy is likely to produce positive cash flows in both directions with break even at 0.9488 and 0.9733 levels. Ensure the 3-leg strategy to have a net delta at -0.41.