Fxwirepro: Japan Prints Upbeat Retail Sales – Hedge Cad/jpy Risks Via 3 Way Straddle Vs Call As Ivs and steady Gamma Indicate

Key Economic Fundamentals:

The yen eased further in Asia on Monday after retail sales data came in better than expected with investors focused squarely on the prospect of a Federal Reserve rate hike as soon as next month.

Japan prints upbeat numbers of retail sales, for April it fell 0.8 percent, less than the 1.2 percent decline expected YoY.

On data front, Canadian current account and GDP are scheduled to be released today and tomorrow respectively. On the flip side, Japanese unemployment rate, industrial production, manufacturing PMIs and consumer confidence are on data radar.

The Japanese Yen finished last week lower against the majority of G10 FX as traders react to ECB & anticipate the BoJ & Fed this week.

OTC outlook & Hedging Framework:

CADJPY spot is testing to approach minor resistance at 85.175 levels and may struggle for sustenance and as a result CFDs of this pair slightly have been drifting down.

The implied volatility of 10D CADJPY ATM contracts 12.54 percent and creeping up at 13.89 percent for 1m tenors.

3-Way Options straddle versus Call

Spread ratio: (Long 1: Long 1: Short 1)

Rationale: Since ATM IVs are growing in snail’s pace, shorting expensive OTM or ATM calls with shorter expiries would likely result in positive cash flow on expiration as the pair is testing supply zones and seems unlikely to show dramatic break out above.

On the contrary, we trust pair may move in either direction but capitalizing on steady IVs with no significant data drivers in short run that could bring in considerable IV spikes, Gamma of OTM strikes and corresponding IVs also in sensitivity table are reducing, thus such OTM instruments seems beneficial and deploy in our strategy.

The Execution:  

Go long in CADJPY 1M at the money delta put, Go long 1M at the money delta call and simultaneously, Short 2W (1 percent) out of the money call with positive theta or closer zero.

If one is bearish to very bearish, then one can even eye on writing ATM or ITM calls as well as an alternative to shorting the underlying spot FX.

Published: 2016-05-30 06:51:00 UTC+00

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