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Technical glimpse: AUD/USD hasn't been able to to break resistance at 0.7650 levels quite often in recent times (see weekly charts for inability to take the rallies above 0.7650 from last 2-3 weeks).
As a result, last week we've seen the price drops to slip below 7DMA.
OTC updates:
1W ATM IVs of AUD/USD is the highest among G10 currency space (more than 14%).
The premiums on ATM calls are trading 20.95% more than Net Present Value of the contracts. While, risk reversals are still indicating bearish risks.
Option Strategy: 3-Way diagonal options straddle versus OTM call
Spread ratio: (Long 1: Long 1: Short 1)
Rationale: Contemplating above mentioned technical reasoning, and the disparity between ATM implied volatilities of 1W expiries and call option premiums, we reckon the shorts on slight OTM strikes of call would benefit straddle strategy.
Most importantly, let's have glance on OTM strikes and their relevant %change in premiums & %probabilities of expiring these strikes in the money that keeps us eye on shorting expensive calls with shorter expiries in conjunction with ATM straddles.
As a result, we capitalize on such beneficial instruments during higher volatility times and deploy in our strategy.
How to execute:
Go long in AUDUSD 1W at the money -0.49 delta put, go long 1M at the money +0.50 delta call and simultaneously, Short 1W (1%) out of the money call with positive theta or closer to zero.
Margin: Yes, required to short OTM calls.
Description: Trade the expectation of increased volatility without taking a view on direction but slightly bearish bias.
A strategy usually utilized over significant economic data events and other political events.
Return: The profitability increases as the underlying spot FX of AUDUSD rises but to the extent of OTM strike price and it would be unlimited returns on slumps.
Risk: Underlying pair should not exceed OTM strike within maturity chosen on writing call option.
Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).
Note: Extra bit of advantage comes through shorting on OTM call that finances the total cost of trade but be mindful of OTM strikes.
