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The current IVs of ATM contracts of this pair are at higher levels above 17.55% but have shrunk away after central bank policy events that are scheduled ahead in this week, it is likely to perceive at 15.58% and at an average of 16% in long run (see for 1W IVs across 1M-1Y ATM IVs).
Eyeing cautiously on any abrupt upswings in EURJPY and shrinking IVs, shorts have been favored by acknowledging the implied volatility fading away in of Euro crosses (see nutshell).
Pease be noted that the negative risk reversals of EURJPY have been the second highest negative flashes among G7 currency space.
As the delta risk reversals have again shown in bearish interests as the progressive increase in negative numbers signify the traction for hedging sentiments for downside risks in both short and long term, it encompasses many risky events in both short and long run that could pose potential headwinds for sides of this pair.
For an instance, the risky event such as Brexit event in the short run could hamper euro’s prospects. Given concerns over limits of the policy arsenal at the BoJ and rising euro-centric risks, we recommend initiating short EURJPY positions for long term hedging.
The pair is likely to perceive implied volatility close to 16% over long-term tenors that are in sync with increased in negative risk reversals, thus, we recommend deploying short put ladder spreads that contains proportionately less number of shorts and more longs which would take care of potential slumps on this pair and significantly higher volatility times.
Gauging with the bearish market sentiments for this pair, we reckon that for next 2 months’ time Yen may pretty much appreciate against lots of manipulations and ambiguities are surrounding around the euro.
So, short ITM put with shorter expiry since implied volatility is inching higher when risk reversals are lesser comparatively to 1M expiries that is good for option writers in next 1 week, so the strategy goes this way, go long in 2 lots of ATM and OTM put with longer expiry (per say 2M expiries) and simultaneously short 1W ITM puts with positive theta values.
