FxWirePro: Rosy opportunity in writing strangles as USD/ZAR back in range

The rising oil price and a rise in US yields caused the EM currencies to depreciate against USD since the start of the week, with the South African rand recording the heaviest losses. USDZAR bounced back towards 12.40 areas.

While we maintain a neutral strategy on ZAR foreseeing no strong case for directionality in either direction.

We foresee ZAR to continue benefitting from strong inflows at any time.

On the other hand, the currency remains overvalued vs. its terms of trade.

We expect the current account deficit to widen and SARB's easing to gradually decrease carry.

The benign inflation outlook supports asset valuations and suggests SARB may ease further.

Well, shorting strangle options strategy was advocated about a fortnight ago, USDZAR is the recommended pair to sell DNTs in early January when the political noise was published; the above chart explicitly shows that the underlying spot FX convincingly breached its barriers over the advised period. Thereby, desired yields are certain by the way of initial premiums received.

As you could observe weekly plotting of USDZAR, the intermediate trend of this pair has been oscillating between the stiff range (refer rectangular area). It was recently breached on southern side, but in the recent past, it was bottomed out at 11.5047 levels and bounced back to go in the same range.

Thus, on trading grounds, writing strangle strategy is advocated. To execute this strategy, short 2w (1%) OTM puts and (1%) OTM calls of similar expiries at the net credit. On hedging grounds, we would like to maintain shorts in USDZAR by buying 2m ATM -0.49 delta put options with a view to arresting downside risks.

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