FxWirePro: CAD/JPY Options Strips Strategy Ahead of Monetary Policy Season

The major central banks may also come back in focus, starting with BOJ (Tue), BOC (Wed) and ECB (Thu) this week, Fed and BOE next week and RBA in early February. The BOE and RBA may be in play, with rate cut expectations mounting. The rest of the central banks will likely be in stasis. In those cases, focus on their rhetoric on macro outlook and/or fiscal stimulus.

Canada has a busy week of data and event risk ahead. House price data (Mon & Weds) may attract a little more attention than usual amid signs that supply shortages are increasing. Manufacturing Sales (Tue) and Wholesale Trade (Weds) add to Nov activity data. CPI (also Weds) precedes the BoC policy decision and Jan MPR (10 AM) and Gov. Poloz press conference (11.15 AM). Nov Retail Sales are released at the end of the week.

Tomorrow morning the Bank of Japan’s (BoJ) decision is due. A rather depressing event. What exactly are the Japanese central bankers going to say? Following nearly 30 years of expansionary monetary policy their tools have long been used up. 

However, understandably they do not want to admit to the fact that they have reached the end of the line—despite the fact that they had to admit to the side effects of the permanently expansionary monetary policy a long time ago. So it is likely that tomorrow the BoJ will bravely pretend once again that it could become even more expansionary. And nobody will believe it. The analysts will once again focus on the marginally changed content: the BoJ’s new projections, its view on the effects of an even more expansionary fiscal policy (that is just as rampant as the monetary policy). As if such marginal factors were able to untie the Gordian knot that is tying up the BoJ.

Despite this recent beta-driven CAD strength, the view for underperformance in 2020 on domestic factor still holds, though may be less front-loaded than originally expected. This view has been predicated on an expected dovish BoC responding to a broadly-weaker economy, potentially forced to ‘catch up’ to other central banks globally, having earlier eschewed rate cuts in 2019, thereby warranting some catch-up CAD weakness.

OTC Updates and Options Strategy: 

The positively skewed CADJPY IVs of 6m tenors have been well-balanced on either side, signaling both bearish and bullish risks (refer 1st exhibit). While considering the technical chart for the minor uptrend and major downtrend (2nd & 3rd charts). 

Accordingly, we advocated options strips strategy to address any abrupt upswings in short-run and the major downtrend.

We’ve been firm to hold on to this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of 1m tenor. It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of customized version of options combination and more bearish version of the common straddle.

Huge profits achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with a downward move in next 3-months’ time. 

Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards in short run but major downtrend can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentry & Commerzbank

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