After the break out below 1.4949 and the neckline of double top has more downside potential, currently at 1.4786 levels after rejecting resistance at 1.4827 levels.
From last couple of days, it has now been drifting in sideways by showing some selling momentum but on the contrary the bulls are holding stronger supports at around 1.4555 levels.
As we see comparatively more downside potential in this pair as the bulls could not hold onto the recent peaks of 1.4949 and claiming for more dips after breaking important supports to signify more weakness with both leading and lagging indicators to converge this selling pressure. Hence, we could foresee southward journey, probably below 1.45 sooner.
As you can see diagram, the implied volatility of 1m ATM contracts are spiking higher than 12.27%,
So, it means that, the FX option market is expecting the underlying EURCAD price to move by 12.27%, either up or down, over a certain time period.
If EURCAD is trading at 1.4780 and the IV of a 1m option is 12.27%, it means the market expects the price of EURCAD to move either 12.27% above or below its current value in the next one month which seems unlikely considering above technical reasoning.
If you have to evaluate these vols and premiums with probabilistic figures in distinctive scenarios of OTM strikes (see from spot FX 1.4790, as it travels towards OTM strikes, more chances of expiring in the money and huge changes in premiums, so these options pricing seems reasonable, but same is not the case with higher strikes.
Hence, we reckon the delta and vega instruments are more conducive in bearish hedging during such higher volatility times.
So, a smart approach to tackle this pair and potentially profit from volatility is to create a delta neutral position on a security that you believe is likely to increase in volatility. The simplest way to do this is to buy at the money contracts as they are likely to expire in the money with m ore higher probability.
Delta neutral strategies are options strategies that are designed to create positions that aren't likely to be affected by small movements in the price of a security. This is achieved by ensuring that the overall delta value of a position is as close to zero as possible.
As the delta value is one of the Greeks that affect how the price of an option changes. Strategies that involve creating a delta neutral position are typically used for one of three main purposes.
- Profiting from Time Decay
- Profiting from Volatility
- Delta Neutral Values in hedging regardless of underlying fluctuations.
The effects of time decay are a negative when you own options, because their extrinsic value will decrease as the expiration date gets nearer.
The material has been provided by InstaForex Company – www.instaforex.com