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The euro was able to catch up significantly over the past few days (refer above chart). Despite the fact that numerous positive news items should be supporting the dollar: the stock market is booming; consumer confidence is approaching the peaks recorded at the start of the millennium and today’s revision of Q2 GDP data is likely to confirm strong growth of around 4% annualised. Even the Fed has provided positive news as with Richard Clarida an expert was confirmed by the Senate as Vice Chair of the Fed. He is generally viewed as being competent and is expected to support Fed chair Jerome Powell’s path of gradual rate hikes. Nonetheless the dollar was unable to appreciate recently with the exception of the days of the lira crisis when it was in demand as a safe haven.
OTC Outlook: Please be noted that the positively skewed IVs of EURUSD of 1m tenors signify the hedging interest of bearish risks.
While RR numbers of 1w expiries show mild bullish shift in the short-term, whereas bearish risk sentiment remains intact in the long-run (refer long-term risk reversal numbers).
Well, contemplating above-stated driving forces and OTC indications, options strips strategy is advocated on both trading as well as hedging grounds. The options strips strategy which contains 3 legs needs to be maintained with a view to arresting price downside risks.
Option Strategy: Options Strips
Combination ratio: (2:1)
Rationale: Considering the bullish (in near-term) and bearish technical environment (in long-term) and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers.
The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 1M tenors, go long 1w at the money +0.51 delta call option simultaneously.
The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside.
Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 18 levels (which is neutral), while USD is flashing at 28 (which is bullish), while articulating at (13:24 GMT). For more details on the index, please refer below weblink:
