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The delta risk reversals with positive changes of all time frames have alerted the major non-directional trend that has lasted since February 2015 but gradually favours downside hedging risks over the longer period of time, but in the short run, it has been bullish neutral.
While current IVs of 1W ATM contracts of EURUSD are crawling reluctantly a tad below 7%, a massive drop from recent times, as a result option premiums likely to shrink away on account of time decay.
USD risk-reversals should be pressured further to align with the impulsive retracement in spot.
Since from almost last one year, we've been seeing the pair oscillating within stiff sideway trend (ranging 1.1480 to 1.05 levels).
Derivatives strategy for non-directional EURUSD:
Since the EURUSD's implied volatility is perceived to be comparatively minimal from other major G7 pairs and neutral risk reversal sentiments, accordingly we construct a multiple leg of option strategy for regular traders of this currency cross when there is little IV. A total of 4 legs are involved in the condor options strategy and a net debit is required to establish the position.
EURUSD’s non-directional pattern is persisting from last one year or so, but some bullish neutral indications are observed, slight bearish pressures can be seen in the days come, hence, we prefer this strategy there is a massive collapse in implied volatility.
The trader can construct a long condor option spread as follows,
The trader can implement this strategy using call options with similar maturities.
The strategy goes this way, writing an In-The-Money call and buying deep striking in-the-money call, writing a higher strike OTM calls and buying another deep striking out-of-the-money call for a net debit, all strikes should have similar tenors.
Risk reward profile:
Maximum returns for this strategy is attained when the spot FX of EURUSD drops between the 2 middle strikes at expiration. It can be derived that the maximum profit is equal to the difference in an exercise price of the 2 lower striking calls less the initial debit taken to enter the trade.
