The implied volatilities flashed screaming off as the euro crosses tumbled reasonably ahead of the hopes from tomorrow’s ECB’s dovish moves.The catalyst was a warm and fuzzy feeling flowing across major currency crosses after the central bank in Europe is likely slash interest rates in an effort to help stem the tide of selling.Whenever, ECB interest rate decision is announced, and if the ECB is hawkish about the inflationary pressures and outlook of the economy, rise in the interest rates is possible, which in turn bullish for euro, but this time euro zone is facing deflationary pressures.Another failure to meet market expectations could do more even damage the ECB’s deflation-fighting credentials. But the stakes have been further raised by the recent slowdown in economic growth and the return of negative CPI inflation, headline inflation has dropped to -0.2% in Feb.The above table ranks in rising implied volatility among G20 currency crosses, euro overreacting due to tomorrow’s economic event but likely stabilize in coming months. IV and risk reversal readings of EURUSD and EURGBP have been the best buys on the respite from sellers.Hedging bets:The delta risk reversals favour long term bulls as this pair is flashing up progressively with positive numbers that signify hedging arrangements for upside risks over the period of time.The implied volatility of ATM contracts for 1W expiries of euro crosses are spiking sky rocketed, EURGBP nearly at 15% for 1W expiries likely to reduce but picking up for 6M expiries which is conducive for call option holders contemplating risk reversals.While current IVs of ATM contracts are at higher levels but likely to perceive hover around at an average 12.28% in long run that would divulge pair’s gain comparing with OTC sentiments.Hence, considering OTC market reasoning we think upside risks are on the cards, as result we reckon deploying ATM instruments in hedging strategies are worthwhile. So, we decide to initiate a bull option combinations at net credits capitalizing on IVs, RR and ATM calls.So, buy 6M at the money calls with 50% delta, simultaneously, short 1M (-1%) out of the money put with positive theta. When IVs flashing higher and going along with OTC sentiments, the likelihood of strategy’s positive cash flows is very high.
The material has been provided by InstaForex Company – www.instaforex.com