Trading USDJPY upside and GBPUSD downside together as a 2m trade combo takes advantage of their current positive correlation. The correlation between daily returns is the standard way to get rid of stationary issues.

But such a metric is misleading regarding the market direction over time, which is a point of interest when we investigate trades.

We compute instead daily rolling correlations, but sampled over longer periods, namely using bi-monthly and monthly returns.

We now envision the two main correlation scenarios, as we trade USDJPY up and GBPUSD down:  If the correlation between the two pairs was negative and stayed so, we would have either- both FX rates moving in the right direction or we would be wrong on both. Therefore, it would be an ‘all or nothing’ payoff.  

A positive correlation would offer a more balanced profile, as both pairs would move in the- same direction, implying that at least one would go in the right direction.

The expected gain would be actually close to the previous case, with a smaller maximal profit (only one currency gains) but with more certainty (no zero payoff case).

We stick to the positive correlation case, which is the current market configuration and assume that there is a 50% probability (unpredictable future) that both currencies will appreciate. If we buy a USDJPY vanilla call and a GBPUSD put, the former would gain while the latter would lose if the market actually rises.

In this case, we would have paid for both scenarios but only one materialised. Now let’s say that we could buy both scenarios conditionally, with the total cost being smaller than single vanillas. That would significantly improve the odds of the JPY and GBP package.

Trade Tips:

We continue to maintain our existing FX option portfolio that was advocated a few days ago, trading a combo of 2m regular knock-in options with higher targets

Buy USDJPY 2m call strike 103.986 knock-in 99.5, (for the vanilla call, spot ref: 103.218).

Buy GBPUSD 2m put strike 1.2950 knock-in 1.3250 (for the vanilla put, spot ref: 1.3100)

The sum of the two exotic premiums (trading both scenarios conditionally – probability about 70%) is smaller than the cheapest vanilla (trading the GBP scenario unconditionally).

Risk Profiling:

No activation Investors buying knock-in options cannot lose more than the premium initially invested.

However, the USD/JPY call and the GBP/USD put will be activated only if their respective underlying FX rates hit 99.5 and 1.3250 before the 2m expiry.