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Trading USDJPY via FX option spreads
Sean Teo
Sales Trader
Summary:
The recent change in the Federal Reserve's position has influenced Treasury yields, combining with the fact that the Bank of Japan has been consistently dovish at policy announcements has impacted USDJPY. How can traders or investors utilize FX options to benefit from this?
What is happening?
The recent shift in the Federal Reserve's stance of delaying rate cuts, driven by persistent inflation and sustained labor market strength in the US, has led to a rise in Treasury yields. This has widened the gap with Japanese government bond yields, putting downward pressure on the yen. Additionally, increased treasury issuance ahead of record auctions has contributed to lower treasury prices and higher yields. The recent 5-year Treasury auction resulted in a higher yield than expected, indicating lower demand, and thus driving bond prices lower and yields higher. At the same time, the equity market sentiment is leaning towards risk-on, with easing geopolitical tensions and resilient technology sector earnings contributing to a positive outlook.
USDJPY chart
With the recent developments in USDJPY, how might a trader use FX options to express an outlook on the currency and potentially capitalize on future movements?
Bullish strategies
Bull call spread (Debit) - Used by traders with a moderately bullish outlook to profit from upward asset price movement while mitigating risk.
How it works:
- Buy a call option with a lower strike price.
- Simultaneously sell a call option with a higher strike price.
- Both options are typically for the same asset and expiration date.
Pros:
- Cheaper than outright call option
- Limited risk
Cons:
- Profit potential is capped.
- Will need to pay for the option spread.
Bull put spread (Credit) - Used by traders with a moderately bullish outlook to profit from upward asset price movement while mitigating risk.
How it works:
- Buy a put option with a lower strike price.
- Simultaneously sell a put option with a higher strike price.
- Both options are typically for the same asset and expiration date.
Pros:
- Will receive premium from the option spread.
- Limited risk
Cons:
- Profit potential is capped.
Bullish seagull spread - Used by traders with a moderately bullish outlook and think that the underlying asset will not go below a certain price.
How it works:
- Purchase a call option at a lower strike price.
- Sell a call option at a higher strike price to finance the trade.
- Lastly, sell a put option at an even lower strike price.
Pros:
- Receive premium from the spread.
- Cheaper than an outright call option.
Cons:
- Profit potential is capped.
- Significant risk if underlying drops significantly.
Bearish strategies
Bear call spread (Credit) - Used by traders with a moderately bearish outlook to profit from downward asset price movement while mitigating risk.
How it works:
- Sell a call option with a lower strike price.
- Simultaneously buy a call option with a higher strike price
- Both options typically have the same expiration date and underlying asset
Pros:
- Receive a premium for the option spread.
- Limited risk
- Profit potential is capped.
Bear put spread (Debit) - Used by traders with a moderately bearish outlook to profit from downward asset price movement while mitigating risk.
How it works:
- Buy a put option with a higher strike price.
- Simultaneously sell a put option with a lower strike price
- Both options typically have the same expiration date and underlying asset
Pros:
- Cheaper than outright put option.
- Limited risk
Cons:
- Profit potential is capped.
- Will need to pay for the option spread.
Bearish seagull spread - Used by traders with a moderately bearish outlook and think that the underlying asset will not go above a certain price.
How it works:
- Purchase a put option at a lower strike price.
- Sell a put option at a higher strike price to finance the trade.
- Lastly, sell a call option at an even higher strike price.
Pros:
- Receive premium from the spread.
- Cheaper than an outright put option.
Cons:
- Profit potential is capped.
- Significant risk if the underlying rises significantly.
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. In Saxo Capital Markets' Terms of Use, you will find more information on this in the Important Information - Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Capital Markets' website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.
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