FxWirePro: CAD/JPY Diagonal Options Strips To Hedge Both Minor Major Trends Ahead of BoJ

CAD was one of the top performers in global FX throughout 2019 but CADJPY has been a laggard, the major downtrend of this pair has been robust amid mild upswings that seems to be momentary. For JPY, soft equity tone provides a small lift; BoJ's quarterly Tankan survey for Q4 and the core machinery orders data is due tonight. BoJ is scheduled for their monetary policy for the next. The BoJ is the central bank most attuned to the consequences for the banking sector of NIRP, hence its otherwise puzzling reluctance to act as the inflation goal drifts further out of reach. 

While the basis of CAD’s outperformance was a relatively resilient domestic economy, especially set against a global backdrop of ongoing cyclical stumbling and disappointment.

The relative cyclical improvement in Canada allowed for the BoC to buck the trend of global central bank easing that predominated the global monetary landscape, including multiple cuts from the Fed. This significantly improved CAD’s G10 yield advantage. 

Hence, CAD is most likely to lose ground due to the changes to the wording of the statement, but is then likely to stabilise again. In the end the BoC had already prepared the move towards a dovish bias at the October meeting so that at second glance it should not constitute a surprise now.

OTC Updates and Options Strategy: 

The positively skewed CADJPY IVs of 3m tenors have still been signaling bearish risks, the hedgers’ interests to bids for OTM put strikes up to 79.500 levels indicating downside risks in the medium terms (refer 1st exhibit). Please also observe above technical chart for the major downtrend and minor uptrend (2nd & 3rdexhibits). 

Accordingly, we advocated options strips strategy to address any abrupt upswings in short-run and the major downtrend.

We’ve been firm to hold on to this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of 1m tenor. It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of customized version of options combination and more bearish version of the common straddle.

Huge profits achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with a downward move in next 3-months’ time. 

Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards in short run but major downtrend can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentrix