FxWirePro: Hedging EUR/JPY Bearish Scenarios via Delta Instruments Capitalizing on Skewness and Risk Reversals

Although EURJPY has shown considerable price rallies of late, the uptrend now seems to be dragging further but little edgy at 21-DMAs (i.e. at 124.7120 and at stiff resistance of 125 levels) for today.  

We just highlighted some bearish EURJPY scenarios in this write-up: 

1) Euro growth gets stuck below 2% and ECB hikes only in 2020; 

2) The global investors’ risk aversion heightens significantly,

3) The extended political protests in France, a populist tide at the European parliamentary elections in May,

4) The US starts vehemently criticizing Japan’s trade surplus against the US. 

Hedging skewness: Please be noted that the positively skewed IVs of 2m tenors are signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors expect that the underlying spot FX likely to break below 122.50 levels so that OTM instruments would expire in-the-money.

Risk reversals: Most importantly, to substantiate the above indications, bearish neutral risk reversal numbers of all euro crosses except EURGBP (especially EURJPY) across all tenors are also substantiating bearish risks in the long run amid minor abrupt upswings in the short-term. IVs for 2w tenors are on the lower side which is interpreted as conducive for put option writers, and 2m IVs are on the higher side which is good for the put holders.

Overall OTC barometer is a noteworthy size in the forex options market that can stimulate on the underlying forex spot rate. 

Options Trade Tips (EURJPY): Buy 2m EURJPY (1%) ITM -0.69 delta puts for aggressive bears on hedging grounds. If expiry is not near, delta movement wouldn’t be 1-point increase with 1 pip in the underlying spot FX. Which means if the spot FX moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money put option with a very strong delta will move in tandem with the underlying. Source: Sentrix, JPM and Saxo bank

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 17 levels (which is mildly bullish), while hourly JPY spot index was at -135 (bearish) while articulating at (07:36 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex