FxWirePro: ATM higher vols among G7 space may explode EUR/USD as final countdown to Fed – stay hedged with strips

Execution: The spot FX EURUSD is flashing at 1.1312 and we think that the likely outcome of today's FOMC looks to be on a knife edge, with strong arguments for both raising interest rates and leaving them unchanged, as a result the prices will make a significant move most likely in a downward direction.

At the money 2D 0.51 delta calls are recommended buying 1 lot (size 100,000). Two lots of at the money 2D -0.48 delta puts are recommended on the other hand. The analysis tells you a big move is coming. You aren't sure of the direction, but you favor the downside. You enter a long straddle trade with an extra put in hopes of a move down. So thereby we've constructed option strip position at a cost of US$ 2815.

Rationale: Fed Chair Yellen will almost certainly use the press conference to reinforce the message that the FOMC expects to increase rates only gradually and that these will likely peak at a low level. From nutshell showing ATM volatility and delta risk reversal, it divulges that the fact that pair would experience little downside pressure in next 1-6 months future. The higher side volatility of EURUSD ATM contracts for next 3 months is projected. Although trend is puzzling on either sides the bearish momentum is likely to hold on. Huge volatility is expected over next 1-3 months.

As shown in the diagram, if the strategy gets the move you expect towards down, you'll profit more. If the pair spikes up, that's fine too as it is either going to be hedged or still profits are achievable but you'll need a pretty big move just to get back to breakeven.