FxWirePro: CAD/JPY ‘Option Strips’ to strip bearish risks away ahead of Canadian trade balance

Canada has scheduled for the trade balance data announcements today, Canada’s merchandise trade deficit narrowed to CAD 4.25 billion in January 2019 from an upwardly revised all-time high CAD 4.82 billion in the previous month and compared with market expectations of a CAD 3.5 billion shortfalls. It was the second largest trade gap on record. Exports rose 2.9 percent, the first increase since July, mainly on the strength of higher crude oil export prices and imports increased at a softer 1.5 percent, led by aircraft purchases.

CAD is quietly consolidating at the midpoint of the recent range, and remain in the short-term bullish. While crude oil has responded positively to the developments, with WTI inching below $63.76 levels. CADJPY bulls attempt to regain from the last two weeks, though the major downtrend remains intact, the pair has been struggling for momentum at 83.679 levels.

OTC Updates and Options Trading Strategy (CADJPY): 

Positively skewed CADJPY IVs of 3m tenors have still been signaling bearish risks, the hedgers’ interests to bids for OTM put strikes up to 81.500 levels indicating downside risks in the medium terms. Please observe above technical chart for minor upswings in the short run that are to be capitalized for interim longs, while upholding short hedge as the major downtrend remains intact. Accordingly, we advocated options strips strategy to address both short-term upswings 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 similar tenors. It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of the 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 motion. 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 

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -109 levels (which is highly bearish), hourly JPY spot index was at -132 (highly bearish) while articulating at (07:37 GMT). 

For more details on the index, please refer below weblink:

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