FxWirePro: AUD/USD bearish neutral risk reversals and 1m skews indicate bearish risks, Tepid IVs signal theta shorts in PRBS ahead of Fed

OTC outlook and options strategy:

Please be noted that the positively skewed IVs of 1m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.7425 levels (refer above diagram). While bearish neutral delta risk reversal indicates that the hedging activities for the downside risks remain intact, and short-term technical trend indicates the extension of slumps in the days to come (refer technical chart).

Noticeably, ATM IVs of 2w expiries are just shy above 7%. Hence, the lower IVs are deemed as the right time to write overpriced OTM puts.

Ahead of Fed’s monetary policy meeting that’s scheduled on 13th Dec, the bearish stance has been substantiated by bearish neutral risk reversals in 1w-1m which is an opportunity for put longs in long-term as the US central most likely to raise the Funds rates by 25 bps.

While using shrinking IVs of shorter tenors could be interpreted as an opportunity for writing OTM puts or theta shorts in short run on time decay advantage as the spot FX market reckons the price has downside potential for large movement in the days to come which is resulting option holders’ on competitive advantage.

Accordingly, we had advocated put ratio back spreads a couple of days ago, wherein short leg is functioning as the underlying spot FX keeps spiking.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price dips and bidding theta shorts in short run and 1m risks reversals to optimally utilize Vega longs.

On hedging grounds, fresh Vega longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 1m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in short run and bearish risks in long run by vega longs.

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing at -93levels (which is bearish), while hourly USD spot index was at 98 (bullish) while articulating at 10:01 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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