The implied volatility of 1W ATM AUDCAD contracts are at 9.51% and 8.68% for 1 month’s tenor.

Moreover, it is perceived that the further CAD strength is certainly dependent on commodity price recoveries, especially crude oil price which is currently struggling between 42 and 43 levels.

Contemplating this conditional movement of CAD’s exchange rate and lacklustre implied volatility figures we think the opportunity lies in writing a call while formulating below strategy for AUDCAD’s FX risks at this juncture.

Crude prices have now stuck at around $40-42 range per barrel in both WTI and Brent futures, eyeing on an oil-producers meeting to discuss an output freeze at January's levels. Major producers from the Middle East and Russia will attend the April 17 summit, although tensions remain after Iran and Libya expressed their non-committal stance. 

Hedging Framework:

Strategy: 3-Way Diagonal Straddle versus OTM Call
Spread ratio: (Long 1: Long 1: Short 1)

Rationale: ATM implied volatility of these ATM 1W contracts are at lower side, low IV implies the market reckons the price would not move dramatically and so that it is beneficial for option writers.

At current spot at 1.9896 the pair likely move in range bounded trend and as a result we have stagnant IVs displaying (9.87%), keeping these factors into consideration we would like to play it safe by achieving certain returns though shorting a strangle ahead of Sunday's OPEC’s meeting.

Hence there exists a considerable disparity between spot FX moves and vols that keeps us eye on shorting expensive calls with shorter expiries. As a result, we capitalize on such beneficial instruments and deploy in our strategy.

Execution:

Go long in AUDCAD 1M at the money -0.49 delta put, and go long 2M at the money +0.51 delta call and simultaneously, Short 1W (1%) out of the money call with positive theta.