FxWirePro: Fresh Hedging Observed in EUR/USD Ahead of ECB - Bid 3m Risk-Reversals and Uphold Hedging via Put Ratio Back Spreads

Today, you see no change in ECB, but the fresh change in EUR OTC markets. Well, the FX market seems to be desperate for information on ECB monetary policy. It would seem that the council is deeply divided into a “keep going” camp and a fraction who is tired of the ultra-expansionary monetary policy. In times during which monetary policy is moving in uncharted territory (key rate at lowest levels ever, QE programme at its most aggressive) it is difficult to form expectations regarding future monetary policy even if the signals a central bank is sending out are unambiguous. 

OTC Updates:

The FX OTC hedging sentiments are suggesting the downside risks are on the cards, the IVs and risk reversals of 1-3m tenors indicate bearish risks are back in action.

The fresh negative risk reversal numbers (RRs) across 1m-3m tenors are observed to indicate renewed weakness, which is in line with the IV skews and the major downtrend of the underlying EURUSD spot.

To substantiate these indications, 3m skews are stretched on either side (equal interest in both OTM call and OTM puts), 3m positively skewed IVs have still been signalling downside risks and upside risks as well. Skews stretched towards OTM put strikes signifies hedgers interest in the further bearish risks in the major downtrend.

All these indications coupled with the fundamental factors and the underlying scenarios are attractively appealing ITM put holders. Contemplating all these factors, we advocate below options strategy.

The interim upswings likely to prolong but the sustenance seems dubious in the long-run. So, it unwise to ignore the bearish stance in the major downtrend which is emphasized even in our technical section as well.

Today’s monetary policy press conference is unlikely to change that. There is no decision to take anyway. Initially the central bankers have to wait for the effects of the most recent decisions. And as it is the last press conference under Mario Draghi as President his comments are unlikely to clarify the future course of the European central bankers. In view of Christine Lagarde taking over, focus will be on stressing continuity. But that is what is always said when there is a new appointment at the top of an important institution. Statements of this nature do not provide any relevant information.

That means: 1.) The ECB meeting is largely a non-event. (2.) The uncertainty about the ECB remains unchanged. The suspicion that it is moving close to the end of its monetary policy options is taking hold. The initial suspicion has ended the EUR downtrend seen since the summer.

Hedging Strategies: At spot reference: 1.1175 level, initiated long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors, write an (1%) out of the money put option of 2w tenors. Short-legs go worthless as the underlying spot price hasn’t gone anywhere. Any slumps from here onwards are to be arrested by the 2 lots of ATM long-legs.

Those who are sceptic about mild rallies, 3m 1% in the money puts with attractive delta are advised on a hedging ground. Thereby, in the money put option with a very strong delta will move in tandem with the underlying.

Those who want to participate in the prevailing rallies in the short run, one can freshly initiate the strategy. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: Sentrix & Saxobank