Long EUR/JPY backspreads, Risk Reversals signal ATM put costlier

FX:EURJPY   Euro / Japanese Yen
23 0 2
EUR/JPY Technicals:

EUR/JPY             broke 131.80 - 61.8% retrace of the 126.08-141.06 April/June up-leg.

Bears need a daily close below 131.80 to sustain the offered structure Tenkan & kijun lines are negatively aligned, reinforcing the bearish bias.

We prefer to short ahead of Wed's 133.55 peak.

Option Strategy:

Please observe how delta risk reversal numbers are getting higher negative values gradually in a long run (flashing at negative 1.65 for 1 year expiries).

Volatility smiles most frequently show that traders are willing to pay higher implied volatility prices as the strike price grows aggressively out of the money. (IV grows at 12.2% which is quite higher).

1W At The Money 50% delta puts are trading 13% higher than NPV. The current spot FX is trading at 132.40, we expect dips extending up to 131.06 levels in near terms.

It is understood that bearish momentum is bolstering as we saw that from delta risk reversal table and above technical indications. Hence, aggressive bears can initiate strategy using ATM 50% delta puts.

The broader the strike difference between short and long puts, the fewer puts you need to sell to cover the price of the long puts. 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 now is to add an extra long on put with 1m expiry to the existing debit put spreads and fresh backspreads can built in capitalizing on overpriced ATM puts on short side with 1w expiries.

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.

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