Before we begin, let's just refer below link for our previous write up on the trend prediction:
Still no strength in this pair, more rout on the table as it breaks important support 81.025 as well.
No signs of recovery and leading oscillators.
7DMA crosses below 21DMA again, while shows convergence at zeros on daily and remains below zero on weekly.
A resembling pattern on weekly signifies serious weakness in this pair.
So, how to arrest these risks:
ATM IVs of AUDJPY of 1M tenors is at around 16.81%.
Sensitivity tool signals more positive change in premiums in OTM strikes scenarios.
Thereby, one can initiate trading or hedging strategy using OTM puts which would be even more cheaper.
On hedging grounds, Put ratio Back Spreads are advocated to arrest these downside risks.
Because, the trend signaling risks especially after breaking major supports at 84.001, 82.685 and now 81.025 levels with encouraging signals by technical indicators also as explained in previous technical write up and those stances likely to prolong, and secondly, the traders tend to view the put ratio back spread as a bear strategy, because it employs puts. However, it is actually a strategy.
Options with a higher IV cost more. This is intuitive due to the higher likelihood of the market 'swinging' in your favour. If IV increases and you are holding an option, this is good. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.
As we expect the underlying currency exchange rate of AUDJPY to make a larger move on the downside. As shown in the figure purchase 1M 1 lot of at the money -0.49 delta put, 1 lot of 2M (1%) out of the money -0.37 delta put and sell 1W one lot of (0.5%) In-The-Money put option.