FxWirePro: Long term hedging EUR/USD with butterfly spreads as focus shifts towards Fed’s rate decision

Fed's rate hike expectation in September sneaks demand for volatility games. The current market pricing of the Fed tightening cycle is too depressed in our view. Thus, we see value in positioning for higher US rates but prefer to do this via a wider spread to euro rates.

We are firm with our recent call on EUR/USD, for those who don't like to accumulate either existing shorts on EUR positions or not longs dollar side with minimal delta terms; instead, better to take long term neutral positions such as option butterflies. This offers stiff hedging arrangements; these can be utilized in as a means of hedging instruments until the better clarity on how global factors will pan out (especially Greece matter on euro side which is almost taking a halt with bailout plan but Fed's rate decision on dollar side).

Therefore, buying 45D (+1.85%) Out-Of-The-Money (strikes at 1.1220) 0.32 delta call, buy another 45D (-2%) In-The-Money (strikes at 1.0797) 0.70 delta call and simultaneously sell 2 lots of 45D At-The-Money calls with positive theta values. All the positions should be of late August or early September maturities. As the delta on butterflies would usually be zero, this option combination should also be close to zero.

Hedgers whose is neutral on irrespective market making matters but involved with their international business, this would arrests systematic risks.

Last 3 candlesticks on monthly chart of EURUSD remain sideways that did not indicate anything much on either side. One additional long position would result in net debit.