FxWirePro: NZD/USD higher IV bids writers an opportunity – CRBS hedges extended upswings

Kiwi dollar after continues losing streak that has begun from mid April, it is now making an attempt of recovery a bit as both technical and fundamental indicators are signaling buying sentiments.

Hence, we recommend it is better to cover all your shorts and as shown in the diagram purchase 1 ATM call and (1%) OTM call and simultaneously short 1 lots of ITM call with shorter expiry in the ratio of 2:1.

The lower strike short calls because it finances the purchase of the greater number of long calls (ATM calls are overpriced, so we chose 1% OTM calls as well) and the position is entered for no cost or a net credit.

Vega on Long ATM Call = 77.86
Vega on Long (0.5%) OTM Call = 76.84

The current IV of NZDUSD call is higher side at 14.59% which is good for writers, usually if the Vega of a long option position is positive and the implied volatility rises or dips, the above stated option prices are directly proportional to the implied volatility.

So in this case Vega both on long position is reasonably acceptable. It is desirable that at maturity the underlying exchange rate of NZDUSD to remain near short strikes in order to achieve highest returns.