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The implied volatility of ATM contracts for next 1m-3m expiries of this the pair is flashing at around 10.5%, that is when vital economic data events took place in the euro area.
Euro area composite PMI post a solid gain in October, signaling 1.8% GDP growth, but manufacturing PMIs have missed the forecasts (actual at 53.5 versus forecasts at 55.3).
The improvement was broad-based by sector and country and was reinforced by IFO and EC surveys.
Next week’s 3Q16 flash GDP report to show 1.5%q/q, SAAR growth, with modest downside risk.
October flash inflation report to show core inflation stuck at 0.8% oya.
From almost last two-three weeks we've been seeing the prices of this price sensing strength amid the major downtrend (see technical charts for EURAUD bottoming out from 1.4255 to the current 1.4477 levels).
If you consider long term euro's valuations then you would come across the convergence between spot curve and risk reversals.
EURAUD hedging and speculating sides as per OTC adjustments:
With spot FX flashes of EURUSD at 1.4477, IVs for 1w and 3m contracts have slightly shown a resilience in short run shrinking in the medium run. While positively skewed IVs of 2w tenors signify the OTC market sentiments towards OTM call strikes.
Hence, contemplating these OTC factors and synthesizing them with the technical trend and fundamental factors we understood the following fact.
The current spot prices are expected to show strength and travel upwards in next 1 months times but we are not jumping the guns to conclude this as the bullish reversal, In foreign exchange (FX) market prices move to extremes more frequently and these extreme levels is referred to as “Fat Tails”.
If more price actions occur at the fat tails, the option trader would mark volatility higher for out-of-money (OTM) and in-the-money (ITM) options then at-the-money (ATM) options and so does happen with EURAUD pair currently.
FX option strategies:
So, on both hedging and speculative grounds the strategy goes this way, go long in 1W ATM striking puts, while going long in 1M ATM strikes of 50% deltas.
