FxWirePro: Rosy times for writing AUD/NZD options in construction of “Put Ratio Back Spreads” on hedging grounds

AUDNZD downward momentum persists despite today’s bull swings, the next major target 1.0240 (Sep low) for the weeks ahead.

The pair in medium term perspectives: Higher to the 1.0650-1.0770 area, mainly for valuation reasons. The cross remains well below fair value estimates implied by interest rates, commodity prices, and risk sentiment.

Please be noted that the implied volatility of at the money contracts of this APAC pair has been inched up at a shy above 6.5% and 7% for 1m month 3m tenors respectively, while vega instruments of 3m tenor are signifying the hedgers’ interests in downside risks.

So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings in short run as the lower implied vols are conducive for option writers.

Hence, AUDNZD's lower IVs with theta’s interest on ITM put strikes could be interpreted as the option writer’s opportunity in the medium run.

The two main risks to our bearish AUD view are that (1) the currency is dragged higher in a more sustained re-rating of the global growth outlook and that (2) better global news and some signs of housing resilience see the RBA play for time. We remain of the view that the RBA will ease a further 50bp in this cycle.

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:

Go long in 2 lots of long in 3m ATM +0.49 delta put options, simultaneously, stay short 1m (0.25%) ITM put option, the position may gain if the underlying spot abruptly shows any mild gains. The strategy should be constructed at net debit with net delta at around -0.45.