FxWirePro: Shorts in AUD/CAD put ladder assure certain returns – uptrend to persist upto 0.9500 levels

Currency Option Strategy: AUD/CAD

Buy 1M ATM -0.49 delta put + Sell 7D (1%) OTM put option + Sell another 7D deep (2%) OTM put option, all contracts with similar expiry.

We are better off trading strategy as the implied volatility of ATM contracts of this pair is around 13.76% in order to counter the effects of time decay. Delta of strategy is negative at the start. As such, its value will increase as the price of the AUDCAD decreases.

So, in summary, if the pair falls below the lower (buy) strike, we make potentially uncapped profit until the pair reaches bottom; if it rises to anywhere between the middle and upper (short) strikes, we make our maximum loss.

The extra leg also ensures that we may have two break even points. Vega of this spread is negative and will therefore lose value as implied volatility rises and gains value as implied volatility drops. As such, it is highly disadvantageous to use a long put ladder spread in periods of rising implied volatility prior to expiration.

Technical Roundup:

Those who've constructed the above strategy when we advised this a fortnight ago, the premiums from deep out of the money puts with shorter expiry would have been certain profits. The current short term uptrend may prolong maximum up to 0.9500 levels and after that anytime bearish call may be generated. It is seen that slow stochastic curves went above 80 levels but no signs of %D crossover which signifies the selling pressures and in order to boost this view RSI oscillator is positively converging with price spikes which suggest prevailing short term rallies may prolong upto above stated levels.