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FxWirePro: EUR/CHF risk reversals moving in sync with technicals – short covered strangle as IVs crawl in snail’s pace

We can figure out that least implied volatilities and slightly positive delta risk reversals for EURCHF for 1w-1m expiries. Comparing this sluggish implied volatilities underlying spot price movements, while conducting technical analysis we found narrow range trend for this pair but slightly bullish biased in short run.

But as you can make out from the charts, leading oscillators have already approached overbought territory and likely to signal overbought pressures.

Let's keep an eye on delta risk reversals, it is bullish for next 1w or so, therefore to lock in the certain revenues that are proportionate with the yields available spot FX, consequently maximize the revenues of the portfolio as this strategy to focus on non-volatile advantages.

In such lower IVs and non-directional scenarios, with spot FX at 1.1144 a foreign trader can short strangle when he sells both puts and calls on the same spot FX levels with identical strikes and expiries. So the recommendation is short (1.5%) out of the money calls and (1.5%) out of the money puts with similar maturities or net credit.

This is meant to be a method of certain profits as we anticiapte the spot FX to remain stable well within the strikes and expiries what has been chosen.

But a seller wants IV to fall so the premium falls. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.

As per the risk reversals, even if it spikes up it would not be dramatic movements, so this is instinctive owing to the higher probability of the market 'swinging' in range bounded trend.

Although, you collect the initial cash on both calls and puts writings in the form of premiums but you are obliged to make or take delivery of spot EURCHF in rarest scenarios at the strike price.

The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying pair will experience little volatility in the near term. Short strangles are credit spreads as a net credit is taken to enter the trade.

Well, for this strategy has to be covered, the trader also holds spot FX outrights to fulfill the obligations on calls and essential cash to buy back the puts he has sold. Thus, the writer of strangle is always subject to risk of exercising the options rights. However, the probabilities of being assigned these risks are very minute on both the legs as per the risk reversals.

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