AUD/NZD higher IV bids writers an opportunity – CRBS for hedging

FX_IDC:AUDNZD   Australian Dollar / New Zealand Dollar
208 0 1
Aussie dollar after long lasting losing streak that has begun from July, it is now making an attempt of recovery a bit as both technical and fundamental indicators are signaling buying sentiments.

On daily chart , despite forming a shooting star pattern on rallies, bulls have been disregarding and managed to breach the crucial resistance at 1.0928 levels (see blue colored circled areas in which demand is seen more than supply). But this would be viewed whether it sustains on a closing basis or not in order to set up next targets at 1.1017.

The spot FX at this juncture trading at 1.0969, if it manages these levels on a closing basis then we reckon that this pair would certainly approach 1.1017 which is next resistance.

The leading oscillator RSI evidences the positive convergence with the every price bounces, (currently, RSI trending at 62.9002).

While, no there is no trace of selling indications even if stochastic curve reaches above 80 levels which is overbought zone. %K crossover even above 80s would mean that bulls seem to be in total control over rallies in order to bounce above current levels.

Hence, we recommend Call Ratio Back Spreads, it is better to cover all your shorts and as shown in the diagram purchase 1 ATM call, 1 lot of (1%) OTM call and simultaneously short 1 lot of deep OTM call (2%) with shorter expiry in the ratio of 2:1.

The higher strike short calls because IV is inching higher at 11% and it finances the purchase of the greater number of long calls (ATM calls are overpriced, so we chose 1% OTM calls as well) and the position is entered for reduced cost.

Vega             on Long ATM Call = 62.05
Vega             on Long (0.5%) OTM Call = 57.96

The current IV of AUDNZD             call is higher side at 11% which is good for writers, usually if the Vega             of a long option position is positive and the implied volatility rises or dips, the above stated option prices are directly proportional to the implied volatility .

So in this case Vega             both on long position is reasonably acceptable. It is desirable that at maturity the underlying exchange rate of AUDNZD             to remain near short strikes in order to achieve highest returns.

Please refer below link for diagram:

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