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FxWirePro: EUR/USD options strips bidding 3m RRs and IV skews on lacklustre PMIs
EURUSD prices are back under pressure below 1.1262 (i.e. 21-DMA levels), having failed to break-out stiff resistance at around 1.1324 levels. We are now developing into a bear channel targeting 1.1183 recent lows. For further reading, refer to our technical section.
Surprisingly positive economic data from the US and China, in particular, have recently boosted sentiment on the markets. What is still missing is positive economic news from the eurozone. The publication of composite purchasing manager indices for the eurozone has been lackluster (Service PMIs are at 52.5 versus consensus 53.1 and previous flashes at 53.3 levels and Manufacturing PMIs are at 47.8 against consensus 48.1 levels.
Option Strategy: Options Strips
Combination ratio: (2:1)
The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors, go long 1m 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.
Rationale: Please be noted that the positively skewed IVs of EURUSD of 3m tenors signify the hedging interest of bearish risks. To substantiate this stance, the negative risk reversals across all tenors also indicates bearish risks remain intact in the major trend, while positive bids in the short-run indicate mild upside risks.
Well, contemplating above-stated driving forces and OTC indications, 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.
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. Courtesy: Sentry & Saxo
Currency Strength Index: FxWirePro's hourly EUR spot index is showing -43 (which is bearish), while USD is flashing at 110 (which is highly bullish) while articulating at (09:16 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex