FxWirePro: Dragonfly Doji formation on AUD/NZD, diagonal strips for both hedging and trading grounds

Ever since the downswings are seen on this pair the bearish candles are popping up such as Dragon fly Doji formed at 1.1057 and long real body bearish candle again at 1.1057 levels. For now the leading oscillators have been showing downward divergence. RSI trending near 58.1244 diverging with falling prices, while %D line crossover on slow stochastic at around 80 levels signifies selling momentum is continuing. Currently, %D line trending at 69.9519 while %K line at 65.8571 to signify overbought pressure.

But as it is sensed that all chances of NZD may look superior over AUD in medium term future, we advise to hedge the Aussie dollar's depreciation through below recommendations. Hold 7D At-The-Money 0.50 delta call and simultaneously short 1 lot of 15D At-The-Money -0.50 delta put options with positive theta values and one more put option 15D At-The-Money puts after squaring off call option. The rationale being quite simple in near term the pair may experience slight upswing momentum (Ref: Dragonfly Doji) but we foresee stringent declines in medium term future.

So the strategy involves buying a number of ATM calls and double the number of puts but the timing of acquiring second put would be after the call attaining its maturity. The strip is more of customized version combination as we maintained less time for call so that the option premiums will have economic pricing and more bearish version of the common straddle.

Huge profits achievable with the strip strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move. We've been firm to hold on this strategy on hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy. Hence, any hedger or trader who believes the underlying currency is more likely to plunge downside can go for this strategy.