FxWirePro: Bid 1m2m NZD/JPY IVs - naked puts for aggressive bears and DPS for risk averse hedgers

OTC Outlook

ATM IVs of this pair is trading at 9.95% and 10.11% for 1 and 2m tenors respectively. While 1m ATM puts are trading just at 12.31% more than NPV.

Please also be noted that the options with a higher IV cost more which is why in this case OTM puts have been preferred over ATM instruments. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favor. If IV increases and you are holding an option, this is good. When you write an option, the seller wants IV to remain lower level or to shrink so the premium also fades away.

Option Strategy:

Thus, conservative hedgers can prefer the below strategy:

Debit Put Spread = Go long 2M ATM -0.49 delta Put + Short 1m (1%) OTM Put with lower Strike Price with net delta should be at -0.40.

For a net debit bear put spread reduces the cost of trade by the premium collected (on the shorts of OTM put) and keeps option trader to participate in downward moves and any upswings in abrupt.

Moreover, the risk is capped to the extent of initial premium paid, as opposed to unlimited risk when short selling the underlying outright.

However, put options have a limited lifespan. If the underlying FX price does not move below the strike price before the option expiration date, the put option will expire worthless.

Alternatively, aggressive bears can bid NZDJPY 1m2m IVs & sensitivity tools and buy 75 NZDJPY OTM put of mid-month tenors, sell a 1m in premium-rebate notionals.