FxWirePro: EUR/USD bullish and bearish scenarios - 3m skews pave way for options strangles

Bullish scenarios:

1) The ECB changes guidance in January/March, heralding an end to QE in Sept and hikes by 1Q’19.

2) US corporate repatriation is weaker/slower than expected,

3) Growth > 3%.

Bearish scenarios:

1) Concentrated, sizeable repatriation by US corporates EUR accounts for a third of foreign profits.

2) Draghi challenges impression of a prospective change to dovish forward guidance.

3) A squeeze on record speculative longs, possibly from a sell-off in global risk,

4) MS5 government in Italy or renewed elections after an inconclusive outcome.

But this list of EUR supportive factors is relatively extensive, which is why we have articulated a high degree of conviction in the forecast for further EUR appreciation.

Well, all these fundamental developments are factored in EURUSD OTC markets.

Let’s glance at IV sensitivity tool that indicates mounting changes in the hedging sentiments on either side. This sentiment is substantiated by the positively skewed IVs of these tenors that have been signifying the hedgers’ interests of both OTM calls and OTM puts. Hence, this means that the ATM instruments have the likelihood of expiring in-the-money within their respective tenors.

Hence we advocate buying 3m options strangles comprising of 2m 0.5% OTM calls and 0.5% OTM puts of similar tenors on trading grounds.

Please glance at the payoff structure, as underlying spot FX surpasses barriers. Courtesy: JPM