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Before we jump to the strategic framework, please be noted implied volatilities (IVs) of 1m AUDUSD contracts flash second highest numbers among G10 space with mounting hedging sentiments for FX risks, whereas shrinking IVs in 1w tenors which is good for option writers.
Most importantly, please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.72 levels (above nutshell). While bearish delta risk reversal across all tenors also substantiate that the hedging activities for the downside risks.
Accordingly, we have advocated delta longs for long term on hedging grounds, more number of longs comprising of ITM instruments and capitalizing on prevailing rallies and shrinking IVs in 1w tenors, theta shorts in short-term to optimize the strategy (as shown below).
The execution of hedging strategy: Short 1w (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 1m (2%) ITM -0.79 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.
Since the trend of this pair has been drifting in range as you can see the rectangular area on daily plotting of above technical charts and such price behaviour has been prolonged from last 4-6 weeks, theta shorts in OTM put option have gone worthless and the premiums received from this leg is sure profit.
We would like to uphold 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.
Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price dips and bid 2m risks reversals to optimally utilize delta long put options with a view of arresting bearish risks.
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -103 levels (which is bullish), while hourly USD spot index was at 159 (bullish) while articulating (at 08:30 GMT). For more details on the index, please refer below weblink:
