FxWirePro: NZD/JPY option combinations – 2w2m IVs conducive for both option writers and holders, “Diagonal Collars” to optimize hedging cost

OTC updates and hedging framework:

Please be noted that the 2m IVs are trading at around 11.12%, while 2w IVs are around 9.43%.

In NZDJPY, if you're a skeptic on ongoing rallies to have a restricted upside potential (as stated in our technical write up, the stiff resistance at 83.762 levels) and expects abrupt declines then the below strategy is advisable. Visit our below weblink for more reading on technicals of this pair:

http://www.econotimes.com/FxWirePro-NZD-JPY-bulls-bet-on-bullish-EMA-crossover-bearish-patterns-distort-consolidation-phase--Boundary-binaries-for-leveraged-speculation-552200

Well, we expect NZD to fall through this year, reaching 0.62 against USD at year-end and 78.5-79 range by the end of Q1’2017. The support to growth from migration will fade, while the RBNZ -at the very least–are likely to hold rates steady as inflation normalizes, pushing real rates materially lower.

Ideally, the below option trading strategy is constructed for those who have exposures in spot FX of this underlying pair while, simultaneously, buying a protective put and shorting calls against that holding.

The strategy goes this way: while you're holding longs in spot FX of NZDJPY, go short in 2W (1.5%) OTM striking call and long in 2m (1%) OTM striking put. Since the short term, bullish sentiments are mounting we kept upside bracket little on the higher side.

Options with a higher IV cost more which is why in this case OTM puts have been preferred over ATM instruments. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favor. If IV increases and you are holding an option, this is good.

On the flip side, when you write an option, the seller wants IV to remain lower level or to shrink so the premium also fades away. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.

Use above mentioned IVs (2w2m) for both short and long legs respectively. This strategy is the best suitable if you're writing covered calls to earn premiums but wish to protect himself from an unexpected sharp drop in the price of the underlying security.