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May 20 - 06:55 AM

USD/JPY - COMMENT-USD/JPY Setup Favours Short Volatility Range Plays

By Richard Pace  —  May 20 - 05:01 AM

USD/JPY trades a 109.00 pivot within a 108.00-110.00 range since late April - that's rewarding short volatility option strategies, and still can.

Options thrive on volatility, but there hasn't been enough to justify current USD/JPY premiums, especially as the pair clings to the above mentioned range, so being short has proved fruitful.

However, outright short volatility runs the risk of losses if actual volatility increases, or that range breaks, but there are simple short volatility strategies that only risk an upfront premium.

Range binary options, otherwise known as double-no-touch (DNT) only risk an up-front premium.
They bet on two levels (strikes) not being touched before expiry, to pay a fixed amount.

For example - a 2-week expiry 108-110 DNT demands a premium of 25% of the total payout, which the holder will receive if neither 108.00, or 110.00 have been touched by expiry.

The option will increase in value for each day that passes, and with any setback in implied volatility (dealer estimate of actual volatility and a key determinant of option premium).

For more click on FXBUZ

JPY=EBS Click here

USD/JPY 1-month implied voltility Click here

Refinitiv IFR Research/Market Commentary


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