Interim bulls are jumping to buy in spot FX after taking major support at 111.041, the pair has now broken out strong resistance at 112.670 to evidence mild upswings in short term upto 114.750 levels, both leading and lagging indicators signal interim buying momentum.
As a result, we see little neutral bearish risk reversal numbers as you can understand from the above table the interim bulls may drag further but there onwards market pinned risk numbers suggest an overturn upto 112.450 within 3 days expiry.
This would mean that the positions of significant size in the FX OTC options market may likely to influence on the underlying spot FX rate.
FX Options strikes in large notional amounts, when close to the current spot level, can have a magnetic effect on spot prices. That is, spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta.
On USD side, Trade balance, spending data MoM and FED’s preferred personal consumption expenditure index will be released today during U.S. session.
On JPY side, data release of unemployment rate and retail sales are the key focus for today that are likely to remain unchanged and a slight recovery in retail sales MoM respectively, forecasts at 1% versus previous -0.2%.
The IVs for next 1-3 months tenors are reasonably higher at around 10-10.5%).
Most importantly, delta risk reversal for the pair is still popping up the higher negative values for all expiries, so we believe any short upswings are the best advantage for bears and may be utilized for shorts in hedging strategies so as to reduce the hedging costs. (Compare delta risk reversal with last week).
The pair is likely to perceive implied volatility close to 11.50% of 1W ATM contracts with neutral numbers in negative risk reversals in next 1 week's expiry, thus on hedging grounds we recommend deploying short put ladder spreads that contains proportionately less number of shorts and more longs which would take care of potential slumps on this pair and significantly higher volatility times.
This would mean that market sentiments for this pair have been bearish for this pair. As a result, we reckon that for next 2 months time Yen may pretty much gain out of lots of manipulations and ambiguities are surrounding around dollar.
So, short ITM put with shorter expiry since implied volatility is inching higher when risk reversals are lesser comparatively to 1M expiries which is good for option writers in next 1 week, so the strategy goes this way, go long in 2 lots of ATM and OTM put with longer expiry (per say 1M expiries) and simultaneously short 1W ITM puts with positive theta values.
The material has been provided by InstaForex Company – www.instaforex.com