FxWirePro: Rosy chances to write exorbitant AUD/USD puts in “Reverse Put Spreads” to optimally hedge downside risks ahead of Fed

Let’s also glance on sensitivity tool for 1-3m IV skews would signify the interests of OTM put strikes that would imply hedging sentiments are for downside risks in the underlying spot FX as Fed is most likely to hike rates.

OTC hedging arrangements for downside risks seems intact, you could make this out from the above nutshell evidencing risk reversals, while IVs are spiking higher which is in tandem with the above mentioned underlying forecasts and its rationale.

Please be informed that the nutshell showing negative risk reversals are bids for the hedging for the downside risks, as a result, puts are on more demands over calls. The negative risk reversals across all tenors are indicating the bearish hedging interests.

Please be noted that the 1w ATM puts are overpriced than prevailing implied volatility.

1w ATM puts priced 26% more than NPV, whereas 1w IVs are trading just above 11.29%. hence, we see shorting opportunity in writing overpriced OTM puts.

Option-trade recommendation:

Weighing up above aspects, we eye on loading up with fresh longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 1w (1%) OTM put option as the underlying spot likely to spike mildly, simultaneously, go long in 1 lot of long in 1m ATM -0.49 delta put options and 1 lot of (1%) ITM -0.55 delta put of 2m expiry.