FxWirePro: EUR/GBP Option Strips to Hedge Non-Directional Trend As Per Sensitivity Tool Amid Euro Area Data Season

FxWirePro: EUR/GBP Option Strips to Hedge Non-Directional Trend As Per Sensitivity Tool Amid Euro Area Data Season

19 April 2016, 17:19
Roberto Jacobs
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FxWirePro: EUR/GBP Option Strips to Hedge Non-Directional Trend As Per Sensitivity Tool Amid Euro Area Data Season

Technically, EUR/GBP on EOD technical charts has shown down-streak has now continued from yesterday’s close at 0.7920 to the current 0.7908 levels slipping below 21DMA.

Well, on a broader perspectives, things seem like the euro continue to freezing its long lasting uptrend that has lasted for about 5 months against sterling and losing streak now looks sturdy in early Asian trades today.

You could probably understand as the prices reached near 0.8083 levels (i.e. 61.8% Finonacci retracement levels), that is where the bearish pressure began again coupled with daily technical signals.

In risk reversal nutshell, you can observe neutral risk reversal numbers which could be interpreted when you coupled with above technical signals as that the ongoing Bull Run in the spot FX market has been losing the momentum but major trend has still been bullish biased.

During this puzzling trend situation, we observed that the implied volatility of 1W ATM put with a delta of 0.5 is 9.72% and the implied volatility of 1W ATM call with a delta of -0.49 is 9.64%.

It measures the skewness of the smile, the extra volatility which is added to the 0.5 delta put volatility compared to a call volatility which has the same absolute delta.

Most importantly, as you observe the probability numbers in the sensitivity tool, OTM put strikes are flashing the highest values which is why we devised strategy contemplating all these factors.

Currency Option Strategy:

The options strips were deployed anticipating more downside potential in short term, we've been firm to hold on this strategy on hedging grounds. The potential target on upside is about 50-100 pips where 100-130 pips on downside.

Hence, the weights are to be more to cushion downside risks, as a result we recommend holding 1M at-the-money 0.51 delta call and simultaneously hold 2 lot of 1M at-the-money -0.49 delta put options.

The rationale is that any potential downswings should be optimally utilized, so to participate in that downtrend, weights in the portfolio should be doubled with ATM puts. What makes ATM instrument more productive in our strategy: the delta of this instrument is here at its fastest rate and gets faster as your position come closer to the expiration date. As a result, time decay may have a relevant impact on ATM options.

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