FxWirePro: Butterfly spread to hedge puzzling swings of CAD/JPY

As per our previous post, the prices have recovered on this pair, and now it is time for Yen back again that all chances of Yen may also still look superior over Canadian dollar in long term future but no dramatic differences in prices on either direction, we advise to hedge this pair with below recommendations.

Currently the pair is trading at 92.277 with volatility of ATM contracts marginally inching higher (at 12.5%), we had not expected this much of price bounces to be frank but this should not create any harm for our currency portfolio. We believe CAD's gain is majorly due to crude's strength.

We had the recommendation on buying OTM -0.49 delta put while simultaneously shorting ATM put with similar expiries and buy OTM 0.5 delta call while simultaneously shorting an ATM call with similar expiries. This strategy is structured for a larger probability of earning a smaller but certain profit as CADJPY is perceived to have a low volatility.

The highest return for this strategy is achievable when the pair at expiration is equal to the strike price at which the call and put options are sold. At this price, all the options expire worthless and the options trader gets to keep the entire net credit received when entering the trade as profit.

Technical roundup:

Lot of puzzling has been happening in CADJPY when we consider the intermediate trend of this pair, bullish candles such as dragonfly doji and at 90.217 on daily and it has shown its effect so far, on the contrary leading indicators on the daily charts have started diverging the current upswings that would still suggest the previous downtrend trend to prevail.

Weekly RSI has started diverging with price spikes near 60s (Currently, RSI at 58.3225), while slow stochastic is also reaching overbought zone and we observe %D line crossover that may generate selling pressure at any point of time. The current prices on weekly charts remained well below moving average curve but attempting to crossover which is puzzling long term bearish sentiments. So this week's closing figures would give us clear picture for next trend in this pair.