FxWirePro: Certain yields from EUR/USD short strangle as tepid IVs crawling down in snail’s pace and range bound trend

IVs and delta risk reversal: As you can observe from the nutshell showing IVs, the implied volatility is likely to reduce from 1W- 1M contracts and would likely to perceive the lower side for next 2-3 months (below 10%).

The delta risk reversal indicates hedging interest seen in EURUSD upside risks and accordingly volumes in overpriced calls have been piling up and it would likely remain the same for next 1-3 months or so. You can also observe the convergence between historic and implied vols as well as the risk reversals curve moving in sync with spot FX curve.

Rationale: Since the range bounded market is evidenced so far from last couple of weeks and the continuation is suggested by technicals, shift in risk reversal from negative to positive numbers and lower implied volatility at 8.65% in next 1 month to substantiate this reasoning, thus we recommend capitalizing on this advantage through below option trading strategy.

As the risk appetite varies from different investors to different traders, we've customized our formulation of strategies for such varied circumstances.

Currency Option Strategy for Speculation: Short strangle

Short 2% OTM call and short one more -1.5% OTM put of the same maturity for net credit. The OTM strikes should be selected so as to meet out the above specified bands on both the sides. We've chosen the strikes so as to match the above mentioned risk reversal adjustments with spot FX movements.

This strategy stems in limited returns with unlimited risk when the speculators in FX market ponders that the EURUSD would experience little volatility in the near term.

Expect maximum returns from this strategy when the exchange price of EURUSD on expiration date is trading between the strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.