FxWirePro: CAD/JPY diagonal options strips on its functionality – Uphold directional setup on most likely BoC’s dovish rhetoric

CADJPY slides past 81.600 levels, heading towards to hit 8-months lows as a dovish statement from the Bank of Canada is most likely in its upcoming monetary policy that is scheduled on 09thJan 2019. Investors slashed odds of future rate hikes after the central bank noted that “there may be additional room for non-inflationary growth”. But the outlook for relative central bank policy is offering support as Bank of Canada rate expectations stabilize while those for the Fed continue to soften. Yield spreads have narrowed however oil prices remain weak with WTI breaking below $45/bbl. Western Canada Select also closed below $30/bbl on Friday. Domestic risk is limited and there are no major releases scheduled ahead of the next employment figures on Friday, January 4th.

Measures of implied CAD volatility are climbing and the cost of protection against CAD weakness is at fresh highs. The one year risk reversal is at levels last seen in June 2017. A reminder that CAD seasonals typically run bearish into the end of January.

Options Trading Strategy (CADJPY): Contemplating above factors, although it is sensed that all chances of Japanese Yen may look superior over Canadian dollar in the near-term future; we advise balanced-hedging perspective but to favor slightly CAD’s depreciation through below recommendations.

We’ve been firm to hold on 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 1m at the money delta put option and simultaneously, buy at the money call options of similar expiries. It involves buying a number of ATM calls 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. Hence, any hedger or trader who believes the underlying currency is more likely to slide downside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -30 levels (which is bearish), hourly JPY spot index was at 149 (bullish) while articulating at (10:37 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex