1m ATM IVs are trending more than 14% which is favourable for option holders.

As you can glance through the skewness in 1m IVs of NZDUSD, they highlight more probabilities of underlying spot sensitiveness to the ITM call strikes, and in turn, both the volatility and skewness implicit in option prices, which means underlying spot FX likely to travel towards this directions.

To substantiate these signals, we could also observe suitable bearish signals correspondingly offered by the delta risk reversals.

The Black-Scholes IV curve is asymmetric in the overall sample, displaying a rising pattern with moneyness, and signalling a sharp left skew in the risk-neutral distribution of returns. Also, the IV curve is at, or slightly decreasing, with maturity.

Do note we need to evaluate the strategy payoff at various levels of expiry, as the strategy payoff is quite versatile.

Thereby, we reckon a credit call spread (CCS) is best suitable at this juncture (as shown in the diagram) to take the advantage of potential downswings in this pair, writing an in the money call would be more advantageous on both hedging and speculative grounds.

One can understand as to why we short ITM shorts while choosing ATM longs after seeing the payoff structure amid various rate scenarios.

The strategy not only reduces the cost of trade but also hedges any abrupt upswings as well.

Please be noted that we have chosen narrowed strikes to gain the time decay advantage on the short side, this would likely be more efficiently functioning in this strategy.