FxWirePro: Delta risk reversal indicates EUR/USD option strips for long term hedging

Execution: The spot EURUSD is flashing at 1.1273 and we think the prices will make a significant move most likely in a downward direction. At the money 2M 0.51 delta calls (strike 1.1273) are trading at US$ 2163.41 and it is recommended buying 1 lot (size 100,000). Two lots of at the money 2M -0.48 delta puts (strike 1.1273) are trading at US$ 2058.97 lots (same size 100,000 of each lot) are recommended. So thereby we've constructed option strip position at a cost of US$ 4222.38

Rationale: From nutshell showing ATM volatility and delta risk reversal, it divulges that the fact that pair would experience little downside pressure in next I month future. The higher side volatility of EURUSD ATM contracts for next 3 months is projected. Although trend is puzzling on either sides the bearish momentum is likely to hold on. Huge volatility is expected over next 1-3 months.

How does it work: If EURUSD exchange rate at expiry would still remain at around 1.1273 levels, then the options in both legs would expire worthless and this strategy goes in vein. But on the flip side, if the pair drags unto 1.0840 which is the near term strong support by the time of expiration, then our ATM puts will be in the money and worth more premiums while the calls will expire worthless. The value of the put will partially offset the initial investment for a total loss. If the pair trades at expiration slightly higher than that level, then the calls will be worth even more while the puts expire worthless.

If the pair starts spiking up above prevailing exchange rate (i.e. 1.1273 and above) by the time of expiration, then the puts will expire worthless while the calls will be worth more. The value of the call will offset the initial investment and you will break even. By the time of expiration if the pair trades below 1.0840 levels which is our strong support levels, then the calls will expire worthless while the puts will be in the money and worth more. The premiums of the puts would be greater than the initial investment and the strategy will have made net profit overall.