Please be noted that the neutral IVs in USDCAD are creeping up a tad above 7.5%, the tepid implied volatilities of ATM contracts across all tenors are favorable for option writers.
While the risk reversals, for now, have taken adverse directions in 6 months' hedging sentiments that are bidding for downside risks.
Fading towards 7% and below 7.5% for 1-6m tenors, the tepid IVs among G10 FX space despite the fact Eurozone elections are lined up appear to be conducive for call option writers as the delta risk reversals are also bidding for puts progressively with negative numbers that signify hedging arrangements for downside risks over 6m tenors.
USDCAD can be seen below 1.28 driven by:
1) BoC indicates an intention to normalize rates due to an improved global outlook.
2) Global demand pushes oil prices well above $60 and Canadian oil investment picks back up materially.
Please also be noted that the options with a higher IV cost more which is why in this case OTM puts have been preferred over ATM instruments. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favor. If IV increases and you are holding an option, this is good.
On the flip side, when you write an option, the seller wants IV to remain lower level or to shrink so the premium also fades away.
Hence, if any OTM calls are overpriced, writing such calls are recommended in tepid IVs.
Considering above OTC market reasoning, amid prevailing uptrend we think downside risks can also not to be disregarded in the long term, as result we reckon deploying shorts in such exorbitant call options while initiating longs in ATM puts in our hedging strategies that seem worthwhile under the scenario of the underlying spot FX keeps dipping abruptly driven higher oil prices.


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