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The Aussie dollar has gained little upside traction momentarily. RBA is scheduled for their monetary policy on 4th June. The weaker growth and RBA rate cut most likely to drive AUD’s vulnerability, the projections are at USD0.66 levels by 4Q’2019 ahead of the above event.
RBA took a step towards rate cuts in the recent past; previously, the Bank had indicated that a rising unemployment rate would be necessary to guarantee rate cuts.
We will now quickly run you through OTC outlook of AUDUSD, before proceeding further into the options strategic framework.
Please be noted that the positively skewed IVs of 3m tenors still signify the hedgers’ interests to bid OTM put strikes up to 0.67 level which is in line with the above bearish scenarios (refer 1stnutshell).
Please also be noted that mounting numbers of bearish risk reversals and bearish neutral RRs of the 3m tenors that are also in sync with the bearish scenarios refer to 2nd (RR) nutshell.
In a nutshell, AUD OTC hedgers’ sentiments substantiate that their risk mitigating activities for the downside risk has been clear.
Accordingly, diagonal put spreads are advocated to mitigate the downside risks with a reduced cost of trading.
The execution of options strategy: Short 2w (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 3m (1%) ITM -0.79 delta put options.
The rationale: Contemplating all the above factors, we have advocated delta long puts for the long term on hedging grounds, comprising of more number of ITM long instruments and theta shorts with narrowed tenors for 1m lower IVs to optimize the strategy.
Bearish outlook with rising volatility good for the option holder. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.
While put writers would be on the upper hand on theta shorts in OTM put options that would go worthless on lower IVs as the underlying spot FX keeps rising. Thereby, the premiums received from this leg would be sure profit.
Deep in the money put option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix and Saxobank
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 97 levels (which is bullish), while hourly USD spot index was at -82 (bearish), while articulating (at 10:31GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
