Foreign exchange traders can use a simple option strategy to insure against a big EUR/USD drop under 1.0000, though the cost of protecting the downside is relatively expensive.
The euro is hovering above parity to the dollar, with traders wary of the single currency being forced to levels unseen for decades if U.S. inflation data, due to be released on Wednesday, shows a sky-high reading. nL4N2YU12C
FX options charge a premium for strikes in the direction deemed most vulnerable: one-month risk reversals showed the premium for EUR puts over calls.
This makes it more expensive to cover a EUR/USD fall than a rise.
Those who want to insure against a EUR/USD fall can buy a one-week 1.0000 EUR put option at a cost of 60 pips, priced with spot at 1.0010.
Profit potential is unlimited if spot is below the 0.9940 breakeven point at the July 20 expiry, while losses are limited to the premium paid.
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