FxWirePro: EUR/JPY BPS for swing trading as downswings following delta risk reversal signals

One can observe delta risk reversal for this pair is gradually turning into high negative values, this would mean that market sentiments for this pair have been negative for this pair, on the contrary even if it falls, it would not slip beyond 125.50 in near future and on upside it would not rise also beyond 140.50. Moreover, the pair is likely to perceive implied volatility close to 12-13% of ATM contracts, thus we recommend deploying short put ladder spreads which is suitable for prevailing significantly higher volatility times.

In order to arrest potential downside risks of EURJPY, debit put spreads are advocated as the selling indications are piling up on monthly and weekly graphs. So buying (1%) in the money -0.49 delta put and to reduce the cost of hedging by financing this long position, selling an out of the money put option is recommended.

Rationale behind put spread: If the trader or investor believes that they are in a moderately bearish environment as technicals tend to change in its short term direction at 137.048 and they think of using these price fluctuations in order to maximize profitability, they will use this strategy to take advantage of a decrease in stock price.

Risk/Reward profile: The risk with this strategy is that if EURJPY price rallies above the strike price, the whole amount of the net cash outflow, or net debit paid for the bear put spread, will be lost. The reward accrues as the pair price declines.

Advantage: This allows the trader or investor to put into place a double hedge. By receiving the premium from writing the put with the lower strike price, they offset the price they paid for the put with the higher strike price.