Risk Reversals Suggest Weak Hands Are Long USD, Yen -Seeking Alpha
Risk reversals can be used to represent expectations on currency direction. We often peruse the 25 Delta Risk Reversal to see how a market is positioned towards a currency. This helps us to take a view on whether a currency is overbought, oversold or within normal ranges.
For those unfamiliar, a risk reversal consists of a pair of options, a call and a put, on the same currency, with the same expiration (one month) and sensitivity to the underlying spot rate. Risk reversals are quoted in terms of the difference in volatility between the two options.
One thing it is useful to consider is just where the marginal buyer will come from if the majority of the crowd has already taken a considerable view.
Let’s look at how things currently stand. In the screen grab below we are looking at the price of options of various currencies relative to USD.
So from this we take away that the crowd is heavily long the USD (short the Euro, CHF, GBP etc) and even more long the JPY.
Painful years of trading experience has taught us to always look to be a provider of liquidity to weak hands because weak hands are ultimately losing hands. With extreme negative risk reversals of currencies against the USD it isn’t difficult to work out that weak hands are now heavily positioned long the Dollar. Well, we will buy as many deep out of the money calls as we can on the Euro.
Subject: Two trending markets revisited and analyzed for you
Here is a video analysis of the S&P and Gold markets. The technical analysis was right on at the time, but those markets have changed quite a bit in the last few days. The S&P has had a huge rally and Gold is climbing at a steady rate, so what’s the new analysis? Glad you asked!
Below are two free videos, one on Gold and one on the S&P, that gives us an in depth technical look into these markets. Again the videos are free and very informative. Just Click on the Links Below…
Also- Here’s your chance to analyze that stock you have been thinking about adding to your portfolio. Just enter the ticker of any company, name of a commodity, or forex pair and get your complimentary technical analysis. It cost you nothing and no payment info will ever be requested.
Enjoy and Good Investing!
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