FxWirePro: USD/JPY Currency Derivatives Perspectives; binary puts for targets at 122.25; credit spreads for hedging

After some inconsistent shifts in February and March on the back of the Q1 labour dispute at West Coast ports, the April US trade balance of -$40.9bn was close to its average of the last two years. This afternoon's release is expected to show a small improvement to -$40.5bn.

In the interest of speculators we see buying opportunities in USD/JPY binary puts on rallies for a target at 122.50 and even upto 122.25 levels. We look at either shorting futures of this pair to hit targets of 122.50 & then even 122 levels in medium terms or buying binary puts at current prices can also be beneficial for the same targets with a strict stop loss at 123.25. Thereby risk reward ratio would be at 1 at current levels.

Option Strategy: Credit Call Spread

Hedgers should better focus on bear spreads that offers optimal entry points from current levels.

In order to establish the above stated strategy, hedgers should execute on selling a call option on rallies and purchase another call at a higher strike price for a net credit.

As stated in our earlier posts, we reiterate a bear call spread is better over short call since it has limited risk unlike unlimited risk in case of naked short calls.

Use a short time for maturity (something like 15 day to near month contracts bearing positive theta value) to take advantage of the time decay and give the underlying currency less time to go against you.

Therefore the recommendation would be, buy 7D (1%) Out-Of-The-Money 0.18 delta calls and sell 7D (-1%) In-The-Money calls with positive theta value for net credit receivable. The combined delta should have negative delta somewhere close to -0.62 as we have shorts on ITM calls in our position.