FxWirePro: Deploy “Diagonal Options Strips” to hedge EUR/JPY bidding on IV skews and mounting bearish risk reversals

Please be noted that the nutshell above showing IVs skews and risk reversals of EURJPY have been indicating mounting bearish risks in both short and long run.

On the contrary, technically, the current prices of this pair are still well above 21EMAs. On a broader perspective, bull swings are hovering at 50% Fibonacci levels in the consolidation phase from last one year or so.

We reckon EURJPY IVs are considerably on higher levels among G10 OTC FX space that pops up with rising IVs shy above 9.5% for 3-month tenors (highest among the G10 FX space) having significance in economic drivers that propels this currency pair to anywhere.

We think the same HY IVs with longer tenors are conducive and justifiable for option holders as there are series of considerable economic events lined up going forward.

Well, in order to arrest the bearish risk that is lingering in intermediate trend and long term uptrend in the consolidation phase, we recommend diagonal option strip that favors underlying spot’s upside bias in short run and mitigates bearish risks in long term.

So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 3M ATM -0.49 delta puts and 1 lot of ATM 0.51 delta calls of 1m expiries.

Since the spikes are likely in near term and downswings in longer term seem to be dubious as per the signals generated by risk reversals as well as from IV skews, EURJPY option straps strategy should take care of both upswings and downswings simultaneously. The strategy is likely to derive handsome returns on the downside and certain yields regardless of swings on either side but with more potential on the downside.

Datawise, BoJ yesterday has not surprised by staying pat in its monetary policy, while ECB today has been the center of attention.