FxWirePro: Bidding AUD/USD 1m/3m OTC setup and combination of delta longs/theta shorts to optimize options strategy

The Aussie dollar underperformed in the weeks of broad US dollar strength following the FOMC and ECB mid-June meetings but so far in July, it has been near the middle of the G10 pack.

On the flips side, the USD had been on the defensive for much of the first two trading sessions this week ahead of Fed (that is scheduled today, potentially month-end flow related). But, that dynamic shifted overnight as speculation rose that President Trump may threaten to increase tariffs on $200bn worth of Chinese imports from 10% to 25%. 

Weighing on AUD factor have been a pullback in major commodity prices, metals in particular, investor apprehensions over US-China trade turmoil and the Fed's ongoing optimism on the US economy. 

OTC outlook and Options Strategy:

Please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.72 levels (above nutshell). While we see the mild positive shift in bearish delta risk reversal indicates that the hedging activities for the downside risks remain intact amid mild momentary upswings.

Accordingly, diagonal put ratio back spreads were advocated a couple of days ago, wherein short leg is functioning as the underlying spot FX keeps spiking, we would like to uphold the same strategy on hedging grounds.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price rallies and bidding theta shorts in short run and 3m risks reversals to optimally utilize Vega longs.

On hedging grounds, fresh delta longs for long-term hedging, more number of longs comprising of ITM instruments and theta shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 1m (1%) OTM put option with positive theta (position seems good even if the underlying spot go either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 3m (2%) ITM -0.79 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

Deep in the money call with a very strong delta will move in tandem with the underlying.

Thereby, the above positions address both upswings that are prevailing in the short run and bearish risks in long run by vega longs.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -78 levels (which is bearish), while hourly USD spot index was at 8 (neutral) while articulating (at 08:05 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex