FxWirePro: Prudent to cover shorts in Kiwis dollar ahead of parliamentary polls, long calls on AUD/NZD option straps serve the purpose – Reshuffle straps to strips

The general parliamentary election is held on Sat 23 September. Polling ends at 7 pm NZT, and the results of most votes will be available that evening. Polls have indicated a close race.

NZ goes into the polls and having fallen by 3% or so since a change in leadership for the opposition Labour party ushered in a much tighter contest, we believe it prudent to take profits on NZD short:

1) NZ First has slipped in the opinion polls and may fail to command a kingmaker role in potential coalition negotiations, thereby neutralizing investors' anxieties at the possible influence NZ First could wield over immigration policy.

2) A victory for Labor would certainly usher in a period of institutional uncertainty for the RBNZ, given Labor’s preference for a dual mandate for the central bank, but there’s now a certain risk premium in NZD for this eventuality. A sharp additional drop in NZD on a Labour victory is not a foregone conclusion.

We’ve seen the bearish impact on underlying AUDNZD movement in the major trend. Technically, the price behavior has been weaker with both leading as well as lagging indicators are bearish bias.

To participate in the recent bullish trend, we had advocated option straps strategy that contains 3 legs of vega longs (2 calls plus 1 put). Contemplating above fundamental political developments and the ongoing technical trend of this pair, we now wish to convert this strategy into option strips that likely to fetch desired yields regardless of the trend but more potential on southwards by arresting bearish risks.

The execution goes this way: Initiate 2 lots of 2w longs in -0.49 delta put options, simultaneously, add 1 lot of +0.51 delta call options of the similar expiry, the strategy is executed at net debit. As shown in the diagram, the strategy is likely to derive positive cash flows but with more potential on downside. Maintain above shown option greeks in the positions.

Currency Strength Index: Ahead of NZ parliamentary polls, FxWirePro's hourly NZD spot index is flashing at -103 levels (which is highly bearish), while hourly AUD spot index was at shy above -32 (which is mildly bearish) while articulating. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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