FxWirePro: Safe Bet on EUR/JPY Negative Risk Reversals - Better to Deploy OTM Shorts in Bear Option Combinations

FxWirePro: Safe Bet on EUR/JPY Negative Risk Reversals - Better to Deploy OTM Shorts in Bear Option Combinations

Please observe in the above nutshell how delta risk reversal numbers are inching higher into negative values gradually in a long run (flashing at negative 1.35 for 1 month expiries). 1W at the money 49.5% delta puts are trading 14.32% higher than NPV. The current spot FX is trading at 123.120, all our earlier bearish targets achieved, for now we could foresee more dips extending up to 122.055 levels sooner or later. It is understood that bearish momentum is bolstering as we see that from delta risk reversal table.

Since ATM IVs are also collapsing it is a good news for short term option writers, thus aggressive bears can initiate the strategy deploying long in ATM puts (IVs likely pick up in 1 month's time) and shorts in OTM calls.

But at the same time, the coverage of long-to-short is going to be more difficult in the event of assignment. So, the recommendation for aggressive bears is to add long in 1M ATM -0.49 delta put, simultaneously go short in 1W (1%) OTM call with positive thetas capitalizing on reducing implied volatilities.

Since the option you sell will always be lower on the skew curve it means you are getting a better deal on what you are selling compared to what you are buying.

It makes this strategy a good one if the skew is running a little hot but EUR/JPY hasn't rolled over that much.

The material has been provided by InstaForex Company - www.instaforex.com