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Mar 26 - 06:55 AM

EUR/USD - COMMENT-Trigger Options Are Cheap EUR/USD Downside Protection

By Richard Pace  —  Mar 26 - 04:44 AM

Bearish EUR/USD charts show 1.1600 potential nL1N2LO0BD, reinforced by option flows nL1N2LO0CJ.
Cheap options are available that would allow holders to benefit from more losses for minimal cost.

EUR puts/USD calls risk only an upfront premium and allow the holder to sell EUR/USD at a pre-determined strike and expiry, but there's an additional risk premium for these options in the current environment nL1N2LM0WQ, so they aren't particularly cheap.

However, that downside risk premium can be used to cheapen a regular vanilla EUR put option by adding a knock-out trigger below the strike.
The trigger is considered more likely to be touched and kill the option, hence the discount.

For example, with EUR/USD at 1.1780, one-month expiry (April 28) 1.1700 EUR puts cost $50 pips, so profit if spot is below 1.1730 at expiry.
However, one-month 1.1700 EUR put with KO trigger at 1.1500 costs $12 pips.
Using the 1.1500 knock-out trigger on a 1.1800 EUR put makes it $38 pips, compared with a regular one-month 1.1800 at $93 pips.
Maturity, strike and trigger can be tailored to suit.

For more click on FXBUZ

EUR/USD 1-3-12-month expiry option risk reversals Click here

1-month 1.1800 EUR put Click here

1-month 1.1800 KO 1.15 Click here

Refinitiv IFR Research/Market Commentary


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