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What are your (FX) options - Trade setups for the NZD against the USD and JPY

What are your (FX) options - Trade setups for the NZD against the USD and JPY

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Explore the dynamics of the NZD through six trade setups against the USD and JPY in our latest article. Each currency pairing is analyzed with a bullish, neutral, and bearish approach, providing a strategic edge for forex traders in light of the RBNZ's current stance and global market trends.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

What are your (FX) options - Trade setups for the NZD against the USD and JPY

Introduction

The New Zealand Dollar's climb to multi-year highs against the Japanese Yen encapsulates its current vigor in the FX markets. With the Reserve Bank of New Zealand (RBNZ) maintaining a comparatively hawkish stance, the NZD emerges as a key player amidst a shifting global monetary landscape. This environment sets the stage for tactical forex opportunities, particularly seen through the lens of the NZDUSD and NZDJPY pairs.

The NZD's ascent is further underpinned by a buoyant return of Chinese markets, which could lend indirect support to regional currencies. However, it's the NZD's own potential for interest rate maneuvering that draws traders' eyes, coupled with technical indicators that suggest a continued upward trajectory for the currency. As such, the NZDUSD and NZDJPY pairs present a compelling narrative for traders watching central bank actions and technical signals alike.

In this article, we'll be showcasing six meticulously crafted trade setups, three against the USD and three against the JPY. For each currency pair, we dissect one bullish, one neutral, and one bearish setup to provide a comprehensive view of the potential market movements and strategic entries for traders.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

In this article we're going to cover the following strategies:

  • Bullish strategies
    • Bullish Put Credit Spread
    • Bullish Call Debit Spread
        
  • Neutral / range bound strategies
    • Short Iron Condor
       
  • Bearish strategies
    • Bearish Put Debit Spread
 
Charts of the New Zealand Dollar against the US Dollar and the Japanese Yen

Bullish Strategies

In the first trade setup, showcasing a bullish perspective on the USDJPY pair, you engage in two actions that result in a net premium paid:

  • Trade Type: Put Credit Spread
  • Action: Receive Premium
  • Expiry Date: 22-Mar-2024
  • Strike Price for Sell Put: 0.6180
  • Strike Price for Buy Put: 0.6080
  • Notional Amount: 100,000 (for each leg)
  • Premium Received: 319 USD
  • Initial Margin Requirement: 565.16 EUR (The currency of the margin requirement depends on the base currency of your account)


    Financial Implications:

  • Premium Received: As the trader, you will receive a net premium of 319 USD upfront.
  • Maximum Risk: Your maximum risk is limited to the difference between the strike prices of the two puts (0.01) times the notional amount (100,000) minus the premium received, resulting in a maximum risk of 681 USD.
  • Maximum Profit: The maximum profit is the premium received, which is 319 USD, if the NZDUSD rate stays above 0.6180 until expiration.

  • Breakeven Point: The breakeven point at expiration is 0.61481, which means that the price of NZDUSD needs to expire above this level to be profitable.

    Market Considerations:

  • The NZDUSD rate needs to stay above the breakeven point of 0.61481 for this trade to be profitable. The setup is bullish on the NZD or bearish on the USD, betting that the NZDUSD will not fall below this breakeven point by the expiration date.
  • The risk is limited to the maximum risk amount if NZDUSD falls below 0.6080, as losses from the put option bought will be offset by the gains from the put option sold.
  • The delta of the options indicates the sensitivity to price movements in the NZDUSD pair. In this case, the positive delta of this combination shows that a increase in the pair will be positive for the strategy.
     

    Strategy Summary:

    This bullish put call spread is a moderate bullish strategy with defined risk and reward. It is suitable if you expect the NZDUSD pair to not fall significantly below 0.6180. Your risk is limited to the premium paid, and you receive an upfront premium. However, no additional margin is required since it is a credit spread (you received a net premium). The effectiveness of this trade will depend on the NZDUSD's performance and the volatility of the market leading up to the expiry date.
     
    By engaging in this put spread, you are expressing a view that the NZDUSD will not experience a significant drop before the options expire. The received premium provides a cushion against a small drop, but substantial protection only until the 0.6080 strike. This trade demonstrates a measured approach to a bullish outlook, limiting downside risk while also capping the upside potential to the premium received.
     

In the second trade setup, showcasing a bullish perspective on the NZDJPY pair, you engage in two actions that result in a net premium paid:

  • Trade Type: Call Debit Spread
  • Action: Pay Premium
  • Expiry Date: 25-Mar-2024
  • Strike Price for Buy Call: 93.20
  • Strike Price for Sell Call: 94.20
  • Notional Amount: 100,000 (for each leg)
  • Premium Paid: 37,400 JPY
  • Initial Margin Requirement: 0 EUR (Note: the currency of the margin requirement depends on the base currency of your account)

     
    Financial Implications:

  • Premium Paid: As the trader, you will pay a premium of 37,400 JPY upfront.
  • Maximum Risk: Your maximum risk is limited to the premium paid, which is 37,400 JPY.
  • Maximum Profit: The maximum profit is the difference between the strike prices of the two calls (1 JPY) times the notional amount (100,000) minus the premium paid, resulting in a maximum profit of 62,600 JPY.

  • Breakeven Point: The breakeven point at expiration is 93.574 JPY, which means that the price of NZDJPY needs to expire above this level for the trade to be profitable.

    Market Considerations:

  • The NZDJPY needs to rise for this trade to be profitable. The setup is bullish, betting that the NZDJPY will rise above 93.574 by the expiration date.
  • The profit potential is capped if NZDJPY rises above 94.20, as profits from the bought call option will be offset by the losses from the call option sold.
  • The delta of the options indicates how much the price of the options will move for a one-point change in the underlying currency pair. In your case, the positive delta of the combination suggests a bullish stance on the  NZDJPY pair.

     
    Strategy Summary:

    This bullish put call spread is a moderate bullish strategy with defined risk and reward. It is suitable if you expect a moderate rise in the NZDJPY pair, but not beyond 94.20. Your risk is limited to the premium paid, and no additional margin is required since it is a debit spread (you paid a net premium). The effectiveness of this trade will depend on the NZDJPY's performance and the volatility of the market leading up to the expiry date.
     
    This strategy is designed to benefit from a modest increase in the value of the NZD against the JPY. By buying a call option with a lower strike and selling one with a higher strike, you create a profit window between the two strike prices. Should the NZDJPY rate climb beyond the breakeven point but not exceed the upper strike, this trade will realize a profit. However, if the rate fails to climb above the breakeven or rises too much beyond the upper strike, the strategy may result in a loss up to the amount of the premium paid. It’s a targeted approach that requires precision in predicting the extent of the currency pair’s movement.

Neutral / Range Bound Strategies

Neutral trading setup: Selling (short) an iron condor

In the short iron condor strategy outlined by this third setup, you are employing a neutral position on the NZDUSD, where you anticipate that the price will not move significantly and will remain within a certain range. This strategy involves the following actions:

  • Trade Type: Iron Condor
  • Action: Receive Premium
  • Expiry Date: 22-Mar-2024
  • Strike Prices: Buy 0.6020 Put, Sell 0.6120 Put, Sell 0.6275 Call, Buy 0.6375 Call
  • Notional Amount: 100,000 (for each leg)
  • Premium Received: 332 USD
  • Initial Margin Requirement: 491.09 EUR (Note: the currency of the margin requirement depends on the base currency of your account)
     

    Financial Implications:

  • Premium Received: As the trader, you will receive a net premium of 332 USD upfront.
  • Maximum Risk: Your maximum risk is limited to the difference between the strike prices of the puts or calls (whichever is greater) times the notional amount minus the premium received. In this case, the strikes are 0.01 apart, so your maximum risk is 668 USD.
  • Maximum Profit: The maximum profit is the premium received, which is 332 USD, if the NZDUSD rate stays within the range of the sold options (between 0.6120 and 0.6275).
  • Breakeven Points: The breakeven points at expiration are 0.60868 and 0.63082, calculated by subtracting and adding the net premium received to the strike prices of the sold options.
     

    Market Considerations:

  • The NZDUSD rate needs to remain within a specific range at expiration for this trade to be profitable. The setup is neutral, indicating no strong directional bias but betting that the NZDUSD will not break out of the range defined by the breakeven points by the expiration date.
  • This strategy benefits from low volatility and time decay, as the value of all options will decrease as expiration approaches, provided the price remains within the designated range.
  • The delta of the combination/strategy is around 0, which indicates that the strategy has a neutral stance. 
     

    Strategy Summary:

    This iron condor setup is a neutral strategy with defined risk and reward, involving both call and put spreads. It is suitable if you expect the NZDUSD pair to trade within a range without significant movement in either direction. Your risk is limited to the maximum risk calculated, and you have received a premium upfront. The trade-off is the limited profit potential, which is capped at the premium received. The effectiveness of this trade will depend on the NZDUSD's performance, particularly its volatility and range-bound behavior leading up to the expiry date.

    The iron condor is a premium collecting strategy that works best when the underlying asset, in this case NZDUSD, exhibits low volatility and trades within a range. The received premium provides a buffer against small movements in either direction, but significant moves beyond the breakeven points can result in losses. It’s a conservative approach that aims to profit from the lack of movement rather than significant price shifts. 
     

Neutral trading setup: Selling (short) an iron condor

In the short iron condor strategy outlined by the fourth setup, you are employing a neutral position on the NZDJPY, where you anticipate that the price will not move significantly and will remain within a certain range. This strategy involves the following actions:

  • Trade Type: Iron Condor
  • Action: Receive Premium
  • Expiry Date: 25-Mar-2024
  • Strike Prices: Buy 90.90 Put, Sell 91.90 Put, Sell 93.80 Call, Buy 94.80 Call
  • Notional Amount: 100,000 (for each leg)
  • Premium Received: 35,600 JPY
  • Initial Margin Requirement: 227.88 EUR (Note: The currency of the margin requirement depends on the base currency of your account.)
     

    Financial Implications:

  • Premium Received: As the trader, you will receive a net premium of 35,600 JPY upfront.
  • Maximum Risk: Your maximum risk is limited to the difference between the strike prices of the puts or calls (whichever is greater) times the notional amount minus the premium received. In this case, the strikes are 1 JPY apart, so your maximum risk is 64,400 JPY.
  • Maximum Profit: The maximum profit is the premium received, which is 35,600 JPY, if the NZDJPY rate stays within the range of the sold options (between 91.90 and 93.80).
  • Breakeven Points: The breakeven points at expiration are 91.544 and 94.156, calculated by subtracting and adding the net premium received to the strike prices of the sold options.
     

    Market Considerations:

  • The NZDJPY rate needs to remain within a specific range at expiration for this trade to be profitable. The setup is neutral, indicating no strong directional bias but betting that the NZDJPY will not break out of the range defined by the breakeven points by the expiration date.
  • This strategy benefits from low volatility and time decay, as the value of all options will decrease as expiration approaches, provided the price remains within the designated range.
  • The deltas of the options strategy is close to 0, which indicates a neutral stance of the combination/strategy
     

    Strategy Summary:

    This iron condor setup is a neutral strategy with defined risk and reward, involving both call and put spreads. It is suitable if you expect the NZDJPY pair to trade within a range without significant movement in either direction. Your risk is limited to the maximum risk calculated, and you have received a premium upfront. The trade-off is the limited profit potential, which is capped at the premium received. The effectiveness of this trade will depend on the NZDJPY's performance, particularly its volatility and range-bound behavior leading up to the expiry date.
     
    The iron condor is a sophisticated strategy that is ideal for traders who expect the underlying currency pair to remain within a certain range. The strategy involves selling an out-of-the-money call and put while simultaneously buying a further out-of-the-money call and put to cap the risk. The received premium from the sold options is the trader's maximum potential profit, while the bought options provide protection against significant adverse movements, ensuring that potential losses are known and limited.

Bearish Strategies

Bearish trading setup: Bear Put Spread

In this Bear Put Spread strategy, you take a bearish position on the NZDUSD pair. This strategy involves:

  • Trade Type: Bear/Debit Put Spread
  • Action: Pay Premium
  • Expiry Date: 22-Mar-2024
  • Strike Prices: Buy 0.6185 Put, Sell 0.6085 Put
  • Notional Amount: 100,000 (for each leg)
  • Premium Paid: 377 USD
  • Initial Margin Requirement: 0 EUR (Note: The currency of the margin requirement depends on the base currency of your account)
     

    Financial Implications:

  • Premium Paid: As the trader, you will pay a premium of 377 USD upfront.
  • Maximum Risk: Your maximum risk is limited to the premium paid, which is 377 USD.
  • Maximum Profit: The maximum profit is the difference between the strike prices of the two puts (0.01) times the notional amount (100,000) minus the premium paid, resulting in a maximum profit of 623 USD.
  • Breakeven Point: The breakeven point at expiration is 0.61473, which means that the price of NZDUSD needs to expire below this level for the trade to be profitable.
     

    Market Considerations:

  • The NZDUSD rate needs to expire for this trade to be profitable. The setup is bearish, betting that the NZDUSD will fall below the breakeven point of 0.61473 by the expiration date.
  • The profit potential is capped if NZDUSD falls below 0.6085, as the gains from the bought put option will be offset by the obligations from the put option sold.
  • The deltas of the options combination is negative, which indicates that the strategy is bearish in nature.
     

    Strategy Summary:

    This bearish put spread is a moderate bearish strategy with defined risk and reward. It is suitable if you expect a moderate decline in the NZDUSD pair, but not beyond 0.6085. Your risk is limited to the premium paid, and you have paid a net premium upfront. The effectiveness of this trade will depend on the NZDUSD's performance and the volatility of the market leading up to the expiry date.

    The put spread is designed to capitalize on a bearish outlook for the NZDUSD, with the trader expecting a downward move in the currency pair but with limited risk. This trade is a debit spread, where the trader pays out more for the long position than is received for the short position, resulting in a net outlay of funds (the premium paid). The profitability of this setup hinges on the pair moving below the breakeven point before expiration. If the pair ends up trading above the higher strike price at expiry, the entire premium paid would be lost. 

Bearish trading setup: Bear Put Spread

In this Bear Put Spread strategy, you take a bearish position on the NZDJPY pair. This strategy involves:

  • Trade Type: Bear/Debit Put Spread
  • Action: Pay Premium
  • Expiry Date: 25-Mar-2024
  • Strike Price for Buy Put: 93.00
  • Strike Price for Sell Put: 92.00
  • Notional Amount: 100,000 (for each leg)
  • Premium Paid: 46,200 JPY
  • Initial Margin Requirement: 0 EUR (The currency of the margin requirement depends on the base currency of your account)
     

    Financial Implications:

  • Premium Paid: As the trader, you will pay a premium of 46,200 JPY upfront.
  • Maximum Risk: Your maximum risk is the premium paid, which is 46,200 JPY.
  • Maximum Profit: The maximum profit is the difference between the strike prices of the two puts (1.00 JPY) times the notional amount (100,000) minus the premium paid, resulting in a maximum profit of 53,800 JPY.
  • Breakeven Point: The breakeven point at expiration is 92.538 JPY, which means that the price of NZDJPY needs to expire below this level for the trade to be profitable.
     

    Market Considerations:

  • The NZDJPY needs to fall at expiration for this trade to be profitable. The setup is bearish, betting that the NZDJPY will fall below 92.538 by the expiration date.
  • The profit potential is capped if NZDJPY falls below 92.00, as profits from the bought put option will be offset by the losses from the put option sold.

  • The delta of the options indicates how much the price of the options will move for a one-point change in the underlying currency pair. In this case, the negative delta indicates a bearish stance.

    Strategy Summary:

    This bearish put call spread is a moderate bearish strategy with defined risk and reward. It is suitable if you expect a moderate drop in the NZDJPY pair, but not significantly below 92.00. Your risk is limited to the premium paid, and no additional margin is required since it is a debit spread (you paid a net premium). The effectiveness of this trade will depend on the NZDJPY's performance and the volatility of the market leading up to the expiry date.

    This trade reflects a bearish outlook on the NZDJPY pair, anticipating a decline in the exchange rate. By purchasing a put with a higher strike and selling one with a lower strike, you establish a range within which the trade can be profitable if the rate falls below the breakeven point. The position benefits from a decrease in the underlying currency pair's value and potentially from an increase in implied volatility, which could increase the value of the long put option. However, the risk is clearly defined and is limited to the premium paid for the spread.

Conclusion

To sum up, our analysis across six trade setups for the NZD against the USD and JPY offers a clear path for traders of all stripes. Whether you're looking to ride the NZD's upward momentum, hedge against potential swings, or plan for a dip, these strategies provide practical options. In the fluid world of forex, staying informed and ready to act on such insights is key. With the NZD's current performance and the anticipated economic events, traders should be well-prepared to face the market's next moves.

For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads.

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