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FxWirePro: Can Germany extend robust GDP prints? Is there disparity between EURO RRs and IVs? Diagonal Options Strips to hedge the paradox

The German economy expanded a seasonally-adjusted 0.5 pct on quarter in the three months to June 2018, following an upwardly revised 0.4 pct growth in the previous period and beating market consensus of 0.3 pct, a preliminary estimate showed. However, the statisticians have surprisingly revised the last three quarters of the past year downwards. Overall, 2018 growth is forecasted to 1.8%. In the H2 of the year, the economy is unlikely to grow more strongly, although the risks posed by the Turkish crisis will remain limited.

OTC outlook:Implied volatility skews of 1w tenors seem to have been well balanced on either side, negative skews means that both bulls and bears do not seem be interested in risks of either side. While the positively skewed IVs of EURUSD of 1m tenors signify the hedging interest of bearish risks.

Same has been the case with risk reversal (RR) indications. RR numbers of 1w-1m expiries show mild bullish shift in the short-term. While bearish risk sentiment remains intact in the long-run (refer long-term risk reversal numbers).

We also highlight the underlying pair’s (EURUSD) 1.0340 as a major low, which bottomed-out the cycle from the 1.60 highs in 2008. We foresee the current medium-term pullback as corrective and expect a broader range to develop. Ultimately, the charts signal an eventual move back towards 1.1225 levels in the short-run.

Well, contemplating above-stated driving forces and OTC indications as shown above, accordingly options strips strategy is advocated on both trading as well as hedging grounds. The options strips strategy which contains 3 legs needs to be maintained with a view to arresting price downside risks.

Option Strategy: Options Strips
Combination ratio: (2:1)

Rationale:Considering the bullish (in near-term) and bearish technical environment (in long-term) and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers.

The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 1M tenors, go long 1w at the money +0.51 delta call option simultaneously.

The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside.

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -75 levels (which is bearish), while USD is flashing at 55 (which is bullish), while articulating at (07:33 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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