Please observe in the above nutshell as to how the implied volatilities of EURJPY pair growing in sky rocked pace with delta risk reversal numbers also inching higher into positive values, but in a long run, hedging arrangements for downside risks are still visible (flashing at negative -0.95 for 1 month expiries to -2.5 for 1Y tenors).
1W at the money volatilities of 50% delta puts are at around 15.25% which is currently the highest among G7 currency space.
You can trade the IV value by monitoring an IV chart for a specific underlying market for a certain time period and determine the IV range. The peaks suggest the option is expensive to buy and the troughs suggest the option is inexpensive.
Yen against majors lost after Japan announced its manufacturing PMI that has been quite disappointing, prints at 48.0 versus forecasts at 49.6 and previous flash at 49.1.
And in addition to that, BoJ would likely to hold its monetary policy meeting on 27-28th April where it decides on policy rate and update forecasts on inflation and growth numbers.
In this meeting, the rumours are that the BoJ to maintain negative interest rates on loans, which would mean that the central bank would be supplying out money to the commercial banks and pay them to lend to the economy. This resembles the “TLTROs”, a recently introduced measure by European Central Bank.
Technically, EURJPY after taking support from 7DMA, strong bull swings are to be upheld for many reasons.
Bulls hold stronger at around 124.445 resistance levels along with bullish momentum after jumping above 7DMA on daily chart.
So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 2W ATM 0.51 delta calls and 1 lot of ATM -0.49 delta puts of 1M expiries.
Since, we anticipate upswings in near term as per the signals generated by technicals as well as from risk reversals, this EURJPY option straps strategy should take care of both upswings and downswings, and yields handsome returns on the upside in short term.
Delta of far OTM options is very small which is why we’ve chosen ATM instrument on call. A 1 point movement in underling pair will not have much effect on the option premium.
Investors need to be optimistic that the volatility in the underlying pair will occur during the short lives of the options. Preferably, the movement will occur towards the leveraged side. If the hoped for price swing does occur, these strategies can be quite rewarding.
The material has been provided by InstaForex Company – www.instaforex.com