FxWirePro: Right time to capitalize on NZD/JPY rallies to deploy theta shorts in ‘Put Options Spreads”

Before we proceed further to the strategies, let’s just quickly glance through the underlying NZDJPY price behaviour,the current prices of this pair has taken-off well above DMAs, for now, rallies seem to be most likely in the minor trend but never rule-out the major downtrend. For more reading on the analytic piece of this pair, refer our technical section.

NZDJPY momentum has swung to positive, with potential to reach the 76.00-76.50 area. Global risk sentiment has been positive recently, hurting the safe-haven yen.

NZDJPY’s trend has been within the tight range of 76.859 – 74.040 levels, but the pair is having more bearish traction and expected to depreciate upto 72.5 levels by 3Q’19 as RBNZ outlook remains on hold throughout 2018. NZD has fallen victim to continued weakness in EM and high beta FX. The correlation between NZD and ADXY, in particular, has strengthened materially in 2018 (refer above chart).

We see a reasonable chance of a rate cut from the RBNZ (approx. 30%), it seems likely that this is a prospect for 2019, and will require a further loss of momentum in the activity data. The RBNZ laid out a clear path to a rate cut at the August MPS, which required that growth fails to stabilize over 2Q/3Q. 

BoJ tightening may also be a long way off, but that won’t stop markets from pricing it in, supporting the yen and pushing NZDJPY down below 72.00 by year-end. Hence, we advocate below options strategy on hedging grounds.

OTC Outlook and Options Strategy:

The above-stated bearish stances seem to be factored-in the 1m positively skewed implied volatilities that indicate the hedging sentiments for the lingering bearish risks. Bids are for OTM puts upto 72.00 levels. 

As a result, we construct suitable options strategy favoring slightly on bearish side. 

Initiate 2 lots of 2m longs in (1%) in the money -0.79 delta put options, simultaneously, short 1 lot of (1%) out of the money put options of the narrowed expiry (preferably 2w tenors), the strategy is executed at net debit. 

Writing OTM put options capitalizing on prevailing upswings would most likely mature worthless. Thus, one can pocket the initial premiums on such short option legs and reduces the cost of buying long legs. 

Deep in the money call with a very strong delta will move in tandem with the underlying. The short side likely to reduce cost of hedging with time decay advantage on short leg, while delta longs likely to arrest potential bearish risks.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 60 levels (which is bullish), while hourly JPY spot index was at -52 (bearish) while articulating (at 11:16 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex