The JPY exposure has foundered on the combination of higher US bond yields which JGB’s have been unable to follow courtesy of the BoJ’s cap and lower US election risk.

The rather weak US data of the last few days cautions that the bond bears may not have it all their own way, but we are nevertheless neutralizing our option based JPY exposure to stem any further losses.

Maintain a near month at the money -0.49 delta put in CADJPY. Indicative offer 22.5%, unwind at 2.46%.

Close a 1m 99.0 USD put/JPY call, long a 3m 96.0 USD put/ JPY call. Paid 38.7bp on September 23. Closed at 29.6bp.

We’re neutralizing shorts in USDJPY given the move in bond spreads amplified by the BoJ’s JGB cap and now recommend fading the US election risk premium in CAD, taking losses on a bearish CADJPY option in favour of long CAD exposure versus GBP, also in option form with a correlation bent (a 2-mo at-expiry dual digital in GBPUSD lower, USDCAD lower).

The implied volatility of 2w ATM CADJPY contracts is spiking higher at shy above 10.50%, and at 11.88% in 1M tenors.

Those who want to play it safe in option trading but keep downside risk on the check, use below option trading strategy that spreads the cushion for upside risks as well.

Keeping both IV and trend factors in mind, it is advisable to go long in 1M ATM -0.49 delta put while writing 1W (1%) ITM put with positive theta and delta closer to zero (both sides use European style options).

Margin: Yes for ITM shorts.

Risk/Return Profile: The return is limited by ITM shorts. No matter how far the market moves above that point, the profit would be the maximum to the extent of initial premiums received.

Thereafter, if the underlying spot price keeps dipping below the strike price of the lower strike put at the short expiration date, then the bull put spread strategy suffers a maximum loss.

This credit put spread option trading strategy is recommended when the spot FX is anticipated to inch higher moderately in the near term and not prolonged in long term but continue with long term downtrend.

Trade expects that the underlying spot FX of CADJPY would drop to ITM strikes on expiration and thereafter drop back again.

Thereby, you are speculating the CADJPY's struggle in short run by shorting, and hedge any dramatic downside risks in long term via longs in ATM strikes which is why we advise to use narrow expiries.