FxWirePro: Wise to Load-up ITM Longs in AUD/USD ‘Put Ratio Back Spread’ bidding both Bearish/Bullish Risks Ahead of RBA

Bearish AUDUSD scenarios below 0.69 if:

1) the RBA cuts rates more quickly than we expect; 

2) the Fed responds to firm labor market outcomes by reinvigorating the 2019 rate guidance; 

3) the Financial conditions in China deteriorate materially.

Bullish AUDUSD scenarios above 0.73 if:

1) China eases policy more forcefully and commodities rally; 

2) the Australian unemployment falls below 5% and the RBA closes the door on rate cuts in 2019. 

The Aussie dollar rallied momentarily but the pair has gained further downside traction ahead of RBA monetary policy that is scheduled for the next week. 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 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 despite the mild positive shift in risk reversal (RRs) numbers and broader hedging outlook for bearish risks are signified by the negative RRs of the 3m tenors that are also in sync with the bearish scenarios refer 2nd(RR) nutshell.

In a nutshell, AUD OTC hedgers’ sentiments substantiate that their risk mitigating activities for the downside risks have 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. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium. 

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 the strategy could be executed backed by 2:1 or 3:2 proportion of delta longs and theta shorts with narrowed tenors on shrinking IVs to optimize the strategy.

Theta shorts in OTM put option would go worthless and the premiums received from this leg would be sure profit. We would like to hold the same option strategy as stated above on hedging grounds. Thereby, deep in the money put option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix, JPM, and Saxobank

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 74 levels (which is bullish), while hourly USD spot index was at 46 (mildly bullish) while articulating (at 10:22 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex