FxWirePro: AUD/USD OTM Put Writers Eye On Momentary Rallies, Capitalize On 2w/3M OTC Bids And Hedge Geopolitical Risks

AUDUSD Minor Trend Perspectives: Year-end saw the AUD reach 0.7032 which is a five-month high, but recent geopolitical developments have dragged it back to the mid-0.69s with potential for 0.6900 multi-day. We have utilized deceptive rallies for fresh short build-ups.

The Medium-Term Perspectives: Q4 2019 included two key positive developments for global risk appetite – the Brexit deal breakthrough and the US-China “Phase One” trade deal. This was enough for the Aussie to reach highs since July. Domestically, Australia continues to print trade surpluses and iron ore’s 3-month highs are backed by a bounce in copper prices (coal remains a weak spot). Yet 0.6950 did not give way and it is easy to imagine US-led trade tensions returning in 2020.

Most importantly, we expect the RBA to lower its Australia GDP forecasts and cut the cash rate in Feb, an outcome only about 50% priced. The Aussie should continue to meet sellers with a 0.69 handle over year-end, with risks below 0.66 on anticipation of or delivery of a Feb cut.

OTC Outlook of AUDUSD and Options Strategic Framework: 

The positively skewed IVs of 3m tenors are also in line with the above predictions, they still signify the hedgers’ interests to bid OTM put strikes up to 0.66 levels (refer 1st nutshell).

Please also be noted that bearish neutral risk reversals (RRs) across all the longer tenors are also in sync with the bearish scenarios (refer 2nd (RR) nutshell).

In a nutshell, AUD OTC hedgers’ sentiments substantiate that their risk mitigating activities for the further downside potential has been clear. 

Accordingly, diagonal put spreads are advocated to mitigate the downside risks with a reduced cost of trading.

The combination of AUDUSD’s short-term potential to hit 0.70 and fails from there onwards amid lower IVs is luring for the OTM put options writers. While the medium-term perspective is attractive for bearish hedges via ITM puts.

The execution of options strategy: Short 2w (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 3m (1%) ITM -0.79 delta put options. 

We keep reiterating that the deep in the money put option with a very strong delta will move in tandem with the underlying.

The rationale: Limiting downside though, we expect the RBA to hold steady into 2020 as it remains hopeful on Australia’s growth outlook and spec short A$ positioning is substantial. Any near-term probes above 0.6960 should attract sellers, with our mid-year-end target is still imminent at 0.6600 level which is sync with the IV skews. Courtesy: Sentry, Westpac and Saxobank