FxWirePro: Vols and Greeks for AUD/CAD put ladder in action

Technical Glimpse:

The downtrend that has been gradually prolonging and bearish candles are popping up every now and then with abundant volume confirmation. While %D crossover near 80 levels signifies the selling pressures and in order to boost this view RSI oscillator is converging with price slumps which suggests prevailing downtrend following right valuations.

Currency Option Strategy: AUD/CAD

Buy ATM -0.49 delta put (0.9305) + Sell (1%) OTM put option + Sell another deep (2%) OTM put option, all contracts with similar expiry.

We are better off trading strategy as the implied volatility of ATM contracts of this pair is around 11% in order to counter the effects of time decay. Delta of strategy is negative at the start. As such, its value will increase as the price of the AUDCAD decreases. So, in summary, if the pair falls below the lower (buy) strike, we make potentially uncapped profit until the pair reaches bottom; if it rises to anywhere between the middle and upper (short) strikes, we make our maximum loss. The extra leg also ensures that we may have two break even points.

Gamma would be negative and will increase delta as AUDCAD drops. It will then come to a point where the delta will become positive and the position will start to decline in value as AUDCAD continues to decrease.

Vega of this spread is negative and will therefore lose value as implied volatility rises and gains value as implied volatility drops. As such, it is highly disadvantageous to use a long put ladder spread in periods of rising implied volatility prior to expiration.