FxWirePro: AUD/NZD option strips to target 100-120 pips on buying risk reversal

The risk reversal quotation sigma25 -RR is the difference between two volatilities:

The implied volatility of an ATM put with a delta of -0.45 is 9.35% and

The implied volatility of ATM call with a delta of 0.54 is 9.35%.

It measures the skewness of the smile, the extra volatility which is added to the 0.5 delta put volatility compared to a call volatility which has the same absolute delta.

Currency Option Strategy:

The options strips were deployed anticipating more downside potential, now have a look at the diagram fro prevailing prices of ATM puts and they are moving in line with healthy delta.

We've been firm to hold on this strategy on hedging grounds. The potential target on upside is about 50-100 pips where 100-130 pips on downside.

The rationale is that any potential downswings should be optimally utilized, so to participate in that downtrend, weights in the portfolio should be doubled with ATM puts.

What makes ATM instrument more productive in our strategy: the delta of this instrument is here at its fastest rate and gets faster as your position come closer to the expiration date. As a result, time decay may have a relevant impact on ATM options.

Hold 15D At-The-Money 0.50 delta call and simultaneously hold 2 lot of 1M At-The-Money -0.50 delta put options.

Huge profits achievable with the strip strategy when AUDNZD exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move.

Please be informed that the trader can still make money even if his anticipation goes wrong - but the underlying pair has to move in the opposite direction really fast. The 1 call bought has to beat the cost of buying all the options and still bring in some profits.