FxWirePro: hedge EUR/JPY downside risks through diagonal bear spreads

Currency Option Insights: EUR/JPY

€1.6 billion debt defaults mounting Grexit pressure and we continue to recommend below strategy on hedging grounds, the pair is likely to sense little bearish downside risks, so in order to arrest these bearish risks, diagonal spreads using In-The-Money and Out-Of-The-Money put options are advocated.

Hence, Buy 1M 0.61 delta (+1%) In-The-Money put and simultaneously (-1%) 7D Out-Of-The-Money put with positive theta of EUR/JPY.

This has been the perfect circumstance to deploy the diagonal bear put spread, because we expect EUR/JPY remains unchanged in short run and only goes down below the strike price of the put sold when the long term put expires.

In this scenario, as soon as the near month put expires worthless, the options trader can write another put and repeat this process every month until expiration of the longer term put to reduce the cost of the trade.