FxWirePro: USD/JPY on topsy-turvy swings – Deploy debit put spread as ideal hedging vehicle

USDJPY been oscillating between $115.652 and $104.757 levels from last couple of months, and likely to prolong this trend. We’ve noted some driving forces of both bullish and bearish scenarios.

Bearish USDJPY scenarios to 100 levels given: 

1) The global investors’ risk aversion heightens significantly and 

2) The US starts vehemently criticizing Japan’s trade surplus against the US. 

Bullish USDJPY scenarios to 125 levels given:

1) The acceleration in US inflation leads aggressive Fed hikes and a spike in UST yields, 

2) JPY selling flows related to FDI get a stronger momentum and 

3) Crude oil prices rally significantly which results in sharp deteriorating trade balance of Japan.

USDJPY OTC update is as follows: 

Most importantly, please be noted that the positively skewed IVs of 1m tenors are signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors signal that the underlying spot FX likely to break below 111.00 levels so that OTM instruments would expire in-the-money. 

While negative risk reversal numbers of USDJPY across all tenors are also substantiating downside risks amid momentary upswings in the short-run. IVs for 1w tenors are shrinking away which is good for put option writers, and 1m IVs are on higher side which is good for put holders.

OTC positions of noteworthy size in the forex options market can stimulate on the underlying forex spot rate. The spot may trend around OTM put strikes as the holders of the options will aggressively hedge the underlying delta.

Accordingly, couple of days ago the debit put spreads have been advocated, we would like to uphold the same strategy but with diagonal tenors on hedging grounds.

While both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price rallies and bidding theta shorts in short run and 3m risks reversals to optimally utilize delta longs.

At spot reference of USDJPY: 113.447 levels, buy a 1M/1w 113.85/110.00 put spread (vols 7.60 vs 6.58 choice), wherein short leg is likely to function as the underlying spot FX keeps spiking, we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds. 

Currency Strength Index:FxWirePro's hourly JPY spot index is flashing at 43 levels (which is bullish), while hourly USD spot index was at -46 (bearish) while articulating at (11:12 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex