Forex Investment and Currency Trading

With the holiday season approaching, and implied volatility at very high levels given the actual volatility we have been seeing in the market, there are definitely opportunities for some rewarding trades if we do see the currency market calm down as it so often does at this time of year. We can
see this in the charts below of USD/JPY spot that in the last 20 days has behaved relatively calmly yet implied vols are still historically fairly high. We can also see implied vols declined last year at the end of November until the beginning of January. Suggest a couple of trades to take advantage of this market environment.

Spot ref 96.55

Buy 05January09 USD/JPY 90 101 double no touch
Cost 18.5% USD payout

Given the recent highs and lows of USD/JPY spot this range looks like a decent risk-reward bet.

Sell 05January09 97 USD put reverse knock-in 85
Receive 2.2% USD

Selling this strategy takes advantage of the high vols and high risk reversals in USD/JPY that suggest the knock-in level is perhaps more likely than it actually is over the holiday period when one may expect volatility to fall and the risk reversal to underperform. To reduce the risk of a USD/JPY spot collapse you could consider buying a vanilla or a fader for the same time period with a downside strike against this.

USD/JPY Spot

Imp. Vol USD/JPY

However, in the longer term we believe that volatility in the currency markets is unlikely to decline substantially and with the recent volatility we have seen we expect buyers of options to support the back-end of implied volatility curves. FX strategists also suggest that while in the short term there
is potential for risk aversion to persist and for current trends to continue, there is also a possibility for a US dollar collapse and a sharp retracement back to levels seen earlier in the year, with this most likely against the Euro fundamentally. The following two options are cheap simple ways of putting this longer-term upside view on that takes advantage of risk-reversals which are currently very wellbid for downside.

Spot ref 1.26
Buy 1y EUR/USD 1.55 EUR call ki 1.21
vanilla =1.69% EUR
Cost= 0.86% EUR
Buy 1-year EUR/USD 1.55 EUR call ko 1.19
vanilla =1.69% EUR
Cost =0.90% EUR