Surprisingly the Reserve Bank of Australia (RBA) left interest rates unchanged at 2.25%. The market priced in a 0.25% cut and, before the announcement, AUD/USD traded low as $0.7751. Following the RBA's no-change, the pair rallied over 1% to $0.7841.
Tomorrow, the Australian GDP will be released at 00:30 GMT and is expected to be 2.6% versus previous months 2.7%. Later this week we have the release of the employment situation in the US which leaves the US Dollar under pressure.
Currently AUD/USD is trading at 0.7820 and the 1 day ATM (at-the-money) AUD/USD option volatility is around 13.3%. This is relatively very high; the equivalent EUR/USD volatility is around 10.55%.
A positive GDP figure plus the growing pressure on US Dollar towards Friday’s employment data may cause AUD/USD to rise. If you expect Australia’s GDP to be in line with expectations or better, an interesting position to take is the Bull spread.
A Bull spread is used to profit from an increase in market rate with limited risk and no stop-out. To set-up this strategy, you buy an OTM (out-of-the-money) Put option and, at the same time, sell an ATM (at-the-money) or ITM (in-the-money) Put. As the market rises towards the sell Put's strike rate the positions payout rises.
The below is an example of a Bull spread strategy:
In the top line, we buy a Put option with strike 1% below market (out-the-money) at 0.7745. In the second line, we sell a Put 1% above market (in-the-money) at 0.7902. Both options have amount 100,000 and expire in 2 days. Note that expiry is after tomorrow’s Australian GDP and before Friday’s Non-Farm Payrolls. By selling the more expensive, in-the-money option, we receive money when placing the position.
The payout scenario at expiry is shown in the chart and table below. If the AUD/USD is trading above 0.7828 there is profit which reaches its maximum return of $707 above 0.7898. If the pair trades below 0.7828 there is a loss and a maximum loss of $856 is reached below 0.7742.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
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