FxWirePro: Stiff hedging USD/JPY through credit spreads as Yen holds firm

The yen held firm after the release of central bank minutes from the May summit that renowned questions by one member on the eventual impact of aggressive easing.

As a result Yen against dollar looking firm, tepid rallies of this pair evidenced soon after the benefits of the Bank of Japan's aggressive easing are being outweighed by side effects, one board member said in the minutes of the May released Wednesday.

Board member Takahide Kiuchi has disagreed at recent board meetings and raised for a cut in outright annual government bond purchases to ¥45 trillion from ¥80 trillion now.

If the above stated outright bond purchase is confirmed then we foresee USD/JPY's probable slides going forward until 122.68. However, major trend is uptrend for this pair and remains intact so far except some minor obstacles. So any disruptions in bull rallies can be hedged through below recommendation.

Add longs of 7D (1%) Out-Of-The-Money USD/JPY call and short (-1%) In-The-Money call with the same maturity for a net credit as shown in the diagram.

This combination should have negative delta of -0.49 and negative theta of -0.9.

The highest returns achievable when this bear call spread is the credit received () upon entering the trade.

To reach the maximum profit, the stock price needs to close below the strike price of the lower striking call sold at maturity where both options would expire worthless.