From last two weeks, Aussie dollar against Kiwi dollar has been gaining vigorously (about 5.64% while articulating) as both technical and fundamental indicators are still signalling buying sentiments.But if you compare the ATM IVs with the monthly technical chart, the prevailing bullish swings may not be having the same momentum in rallies as we are seeing it right now.ATM IVs of 1W expiries are at 10.54%, and 8.99% for 1M tenor.Technically, we see a stiff resistance at 1.1290 and 1.1416 levels.If IV is high, it means the market thinks the price has potential for large movement in either direction. Low IV implies the market thinks the price will not move much and so that it is beneficial for option writers.So, the current rallies can very well be interpreted as momentary and resultant effects of RBNZ’s surprising rate cut by 25bps in its monetary policy.Hence, we recommend initiating longs in 1M ATM +0.51 delta call, 1 lot of (1%) OTM call and simultaneously short 1 lot of deep OTM call (2%) with comparatively shorter expiry in the ratio of 2:1.The higher strike short calls because IV is reducing and it finances the purchase of the greater number of long calls (ATM calls are overpriced, so we chose 1% OTM calls as well) and the position is entered for reduced cost.A seller wants IV to fall so the premium falls. You should also note short-dated options are less sensitive to IVs, so in this strategy we have short position suitable to both above conditions.
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