FxWirePro: Load Up Weights in Longs of NZD/JPY Put Ladder As IVs Accelerate in Swift Pace

FxWirePro: Load Up Weights in Longs of NZD/JPY Put Ladder As IVs Accelerate in Swift Pace

On data front, we have the NZ Q1 labour data on Wednesday. The previous quarter’s unusually large drop in unemployment (6.0% to 5.3%) is at risk of partially correcting.

That will be an important input into RBNZ monetary policy thinking, especially following last week’s slightly hawkish shift in stance.

Also out this week is the April QV housing report (also Wed), and there’s the first of the month’s two GDT dairy auctions (on Tue).

Futures markets are predicting another moderate rise in WMP prices, which should be NZD-supportive.

Watch too for the market-moving US April payrolls data on Fri.

Currency Option Strategy: Short Put Ladder

Rationale: More downside in long run and limited upside traction in short run and higher IVs favor option holders.

10D ATM IVs are trending higher at 18.4% which means the market thinks the price has potential for large movement in either direction, but you can observe the %change in premiums as the put contracts drifts into in the money (there exists the crux of derivative contracts).

While, higher probability numbers of these OTM put strikes would imply that the NZD/JPY still carries more downside risks, and obviously risk reversal suggests more bearish sentiments in OTC markets, as a result puts would be on high demand, then it is advisable to gear up with more numbers of OTM strikes in any hedging strategy that would be available cheaper premiums comparatively.

The Execution: Short 1W (1%) ITM put option and simultaneously add longs on 1M ATM -0.49 delta put option and one more 2M (1%) OTM -0.35 delta put option.

Risk/Reward Profile: Maximum returns are limited to the extent of initial credit received in short run if the NZD/JPY rallies above the upper breakeven point (BEP) but large unlimited profit can be achieved should the underlying exchange rate of NZD/JPY  makes a vivid downswings below the lower BEP.

Strategy & Trend (how does it suit in prevailing trend): Since the short put ladder is an unrestricted return with partial risk bearing strategy that is deployed because in addition to the puzzling uptrend in short term and it also takes care of downtrend in long-term, we think that the NZD/JPY would also perceive significant volatility in the near term.

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