We already called for EURUSD downside one month ago at 1.10 (And now the euro is almost at 1.0625 levels), recommending bearish structures via options portfolios.

Please be noted that from the IV nutshell of ATM contracts of 6m tenors, the implied volatilities of ATM contracts of this the pair are flashing at around 9.85% for 1w expiries and hovering above 11% across longer tenors. We reckon that EURUSD 6m implied volatility has been fairly bid, rising above 11.

Our central scenario sees only moderate near term EURUSD weakness, but the current balance of market risks suggests considering more aggressive hedges via options, bearing in mind a case for medium-term depreciation below parity. The 6m expiry is appropriate, as it captures Italian referendum, general elections in German and the second round of the French presidential election on 7 May 2017.

Option Strategies:

A 2m digital put strike 1.0750 KO 1.0450, This cheap option (costing 11% at that time) is now in the money and will expire right after the December Fed meeting (already priced). Though a scenario of further euro downside would be gradual, the risk of hitting the barrier is much higher post-Trump’s election.

Reverse Put Spreads: We see option writers would be on the competitive advantage as you could probably make out from the nutshell showing implied volatilities of ATM contracts of 1w expiries are reluctant to rise comparing to the longer tenors (for example IVs shrinking below 9.85% for 1w tenor and rising over 11% in 1m-1y tenors). Hence, 2w/2m reverse put spreads with strikes 1.0666/1.0890 in 2:1 ratios, the option structures resembling these types with longer tenors are also encouraged.

Buying digital puts for aggressive bears: This trade is a vanilla 6m European digital put with a strike at 0.97. This option likely to deliver its notional amount if EURUSD trades below this level at the expiry, a pay-off of nearly eight times the premium amount. It can be replicated by a very tight put spread and is, therefore, taking advantage of the high skew.  

Buy downside seagull : This variant of the digital put also provides constant leverage below 0.97 but is a zero-cost strategy. The structure fully finances a 6m put spread 0.99/0.97 via a deeply OTM call with a strike at 1.17 (unlimited risk above that level). Since EURUSD entered into consolidation mode in March 2015, its highest level was 1.1717 (August 2015).