From last 2 weeks, USDJPY bull trend remains stuck in an 117-118.500 range (we’ve seen the non-directional trend and shrinking bullish momentum in our recent technical write up).

Thus, we continue to foresee the sideways trend likely to prolong and evidence slight dips.

On the data front, we see no significant data releases in both continents except US unemployment claims due to X’mas and New Year vacation that could propel the underlying.

ATM IVs of this pair is trading a tad below 10.5% for 1w tenors as the sideway trend likely to persist. While positively skewed IVs in 1w tenor signifies the option markets interests in out of the money puts, which would imply that hedging sentiments still remain on downside risks despite the bulls attempt of spiking above from last two months.

Hence, the long put butterfly spread is advocated on speculative grounds that fetches the limited returns and carries the limited risk.

As shown in the diagram, one can initiate this strategy with three distinctive strikes and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put of similar expiries for a net debit.

The execution: Buy (1%) 1m in the money put option, short 2 lots of 2w at the money put options, simultaneously; buy one more (1%) 1m out of the money put option. We keep narrowed expiries to gain the advantage of time decay.

The strategy is to be executed if the FX options trader thinks that the underlying spot FX would not spike or drop much dramatically on expiration.

The maximum return for the long put butterfly is achievable when the USDJPY spot remains unchanged as stated in above range at expiration. At this price, only the highest striking put expires in the money.

The maximum loss for the strategy is limited to the extent of initial debit taken to enter the trade plus commissions.