FxWirePro: Devise ideal AUD/USD options strategy bidding on 1m/1w OTC tools on Jackson Hole symposium and Trump’s apprehension over Fed

The US dollar has come under considerable pressure after US President Donald Trump spoke out against the Fed’s monetary policy. The notable market reaction is likely to be due to the fact that recently Trump seemed to have actually understood that his policy measures so far, in particular the tax reform at the start of the year, would lead to capital inflow and thus a stronger dollar, so that the appreciation had to be seen positively 

While the global risk sentiment remained moderately positive, the US dollar lower and major commodities higher amid chatter about stretched positioning, Trump’s complaints Fed Chair Powell isn’t dovish enough, and the looming Jackson Hole monetary policy symposium.

US 10yr treasury yields plunged from 2.87% to 2.82%, while 2yr yields fell from 2.61% to 2.59%. Fed fund futures yields continued to price almost 100% chance of a hike on 26 Sep. FOMC member Bostic said the economy now needs less monetary policy stimulus, would dissent if hikes caused the curve to invert, and has a baseline of one more hike this year.

The Aussie underperformed in the weeks of broad US dollar strength following the FOMC and ECB mid-June meetings but so far in July it has been near the middle of the G10 pack. Weighing on AUD have been a pullback in key commodity prices, especially metals, bouts of investor concern over US-China trade tensions and the Fed's ongoing optimism on the US economy.

Please be noted 1m IVs of AUDUSD flash highest numbers among G10 space with mounting hedging sentiments for FX risks. 

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 suchprice 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.

Most importantly, please be noted that the positively skewed IVs of 1m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.7150 levels (above nutshell). While bearish delta risk reversal also substantiates that the hedging activities for the downside risks remain intact.

Accordingly, 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 1m risks reversals to optimally utilize delta long put options with a view of arresting bearish risks. Courtesy: Westpac

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 75 levels (which is bullish), while hourly USD spot index was at -97 (bearish) while articulating (at 08:14 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex