Technically, USDTRY bearish momentum stronger after breaking support at 2.8218 levels, today even though pair is spiking the current prices have been well below DMAs and 7DMA crosses over below 21DMA which is still a sell signal. Leading oscillators converge downwards but little indecisive, while MACD is indicative of bearish bias, on the contrary we could also see a strong support at 2.8069 levels.

In OTC FX market, 1W ATM IV of USDTRY is at 9.35% and 9.01% for 1M tenor.

Hedging Strategy of USD/TRY : Diagonal Spread

Hence, go long in 1M ATM -0.49 delta put option while shorting 1W (1.5%) Out of the money put with positive theta or closer to zero for time decay advantage on shorter tenors on short side.

Here in this case, ATM puts are more expensive than OTM options, but cheaper than ITM options.

Because these instruments have the highest Gamma, Vega, and Theta which would mean their premiums are the most sensitive to moves in underlying spot FX.

They are particularly sensitive to Theta as time to expiry approaches.

As USDTRY drifts below spot ref: 2.8169 but remain at or above OTM shorts within 1 weeks time, then the initial premiums received on shorts can be the certain yields.

Thereafter, the strategy constructed above is likely to fetch positive cashflow as the underlying spot FX keeps dipping, but use tenors as accurately as stated above (the expiries used in diagram are for demonstration purpose only).

In the trades’ sensitivity table, you will see the delta expressed as an amount in the base currency of the pair you are trading.

For example, if USDTRY, the delta is an amount in USD. This Delta value is simply a percentage of the option’s total amount.