yields have retreated and the USD has edged back over 1.1900, but the risk of steeper EUR/USD declines remains nL1N2L70H4, making downside protection prudent, with current FX option costs presenting a good opportunity to protect against more losses.
FX option implied volatility is high, and additional premium for EUR put/USD calls makes outright downside protection via vanilla options expensive if steeper spot declines aren't quickly forthcoming.
However, these high premiums make reverse knock-out (RKO) options much cheaper.
With EUR/USD at 1.1900, a regular two-month-expiry 1.1900 vanilla EUR put option costs $114 pips - so profit if EUR/USD is 114 pips below the strike at expiry, with potential profits unlimited.
However, a two-month-expiry 1.1900 EUR put with a knock-out trigger at 1.1500 would cost just $45 pips by comparison, although the option is dead if 1.1500 trades.
Change that expiry to one-month and add the trigger at 1.1600 for a $35-pip premium, or just $23 pips with the trigger at 1.1650.
Maturity, strikes and triggers can all be adjusted to suit.
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