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FxWirePro: Are you bearish on USD/CAD vols? Iron condor for trading as underlying spot likely to go in sideways

Although the prices of USDCAD are trying bounce from last 2 weeks, now remained well below 21DMA that has pulled back into the sideway range lasted for 7 weeks.

Lower IVs of ATM contracts have been lacklustre (1w tenors showing 8.8%) and seem like below 10% in long run.

Any huge disparity exists between option premiums and IVs should a raise a cause of concern as to whether spot FX would move in sync with risk reversals or not.

As we foresee narrow range trend is puzzling this pair on both intraday and weekly charts,

It also shows the neutral risk reversals which indicate underlying spot FX is anticipated to remain in the existing range.

The OTC options market appeared to be more balanced on the direction for the pair over the 1m to 1y time horizon.

Contemplating the tepid IVs the iron condor option strategy appears to be more suitable in current trend of USDCAD.

So, go short in OTM put and long in deep OTM put, simultaneously, go short in OTM call and long in deep OTM call of similar expiries.

These positions may result in a limited risk, and in non-directional trend to have the large probabilities of earning the limited returns when the underlying spot FX is perceived to have low volatility.

The iron condor strategy can also be visualized as a combination of a bull put spread and a bear call spread.

Maximum returns for the iron condor strategy is equal to the net credit received when entering the trade.

Maximum profit is achievable when the underlying spot fx at expiration is between the strikes of the call and put sold. At this juncture, all the options would expire worthless.

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