As the delta risk reversals of euro crosses (except EURGBP) have again shown in bearish interests as the progressive increase in negative numbers signify the traction for hedging sentiments for further downside risks in both short and long term.

To substantiate this bearish stance, positively skewed IVs of 1m tenors are signifying the hedgers’ interests in OTM put strikes. This implies underlying spot likely plummet further southwards.

Since EURJPY OTC markets seem to be highly volatile with the extremely bearish environment, and IVs for 1M contracts are the highest among G10 FX space (above 16%). This would be good news for option holders contemplating the prevailing bearish environment but more number of longs in ATM delta puts would ensure the reasonable probabilities in underlying exposures.

To factor in the weakness in this pair as we could see reasonable IVs even in next 1-3m expiries, we recommend capitalizing more on bearish signals and the IV factor in the long term by employing OTM longs matching with ATM longs to construct back spreads that likely to fetch positive cash flows.

While 1w IVs are shrinking away (i.e. below 8.5%) which is conducive for option writers.

So, here goes the strategy this way, Go long in 1 lot if 1M ATM -0.49 delta put, long in 2M (1%) OTM -0.36 delta put, and simultaneously short 2W (1%) ITM put, the spread is to be executed in the ratio of 2:1 with net delta at around -0.70.