FxWirePro: Swiss Economic Data and RBA Minutes in Action - Deploy Vega Instruments in AUD/CHF Option Strips for Optimal Hedging
The implied volatility of 10D expiries are spiking at 11.23% and likely to inch higher towards 12.07% for 1m tenors.
At spot ref: 0.7120, since the Vega and gamma are edging higher relatively for OTM put strikes in the sensitivity of an option’s value to a change in volatility, the underlying expectations seems to be quite bearish.
Vega is usually expressed as the change in premium value per 1% change in implied volatility, and if you compare these values with 0.5% OTM strikes (i.e. 0.7084) and both probabilities and vega are indicatives of bearish sentiments. As a result, we reckon the vega instruments are more conducive in bearish hedging.
Technicals also substantiates the same, AUDCHF bearish swings have been traveling in sloping channel with a distance of around 1500-1700 pips. We now emphasize "0.7382" areas as stiff resistance of sloping channel on the monthly graph.
On data front, Swiss PPI in this week and their trade balance for next week, Aussie monetary policy minutes and unemployment rates are likely to provide little impetus in volatility of this pair.
With above technical reasoning, use this strategy as AUD/CHF long term bearish environment holding stronger despite intermediate attempts of bulls taking over rallies and wish to earn capital gains.
Currency Hedging Framework:
Major downtrend continuation is certain to prolong, this is evident as rejecting below channel resistance in technical charts as well, and we want to keep our FX portfolios safe for now, capitalizing a bit on this ongoing downtrend by using any abrupt rallies with an objective of mitigating uncertainties.
Thus, proportions in hedging have to be more on long side to cushion downside risks as a result, we recommend holding 2W at-the-money 0.51 delta call and simultaneously hold 2 lot of 1M at-the-money -0.49 delta put options.
The rationale: Any potential downswings should be optimally utilized during high volatility times, so as to participate in that downtrend, weights in the portfolio should be doubled with ATM puts in order to give the leveraging effects. The profitability can be maximized for every shift towards downside and this is not the same on upside.