FxWirePro: Best chance to write exorbitant GBP/AUD OTM puts in 3-way straddles vs put to reduce hedging cost

OTC Outlook and Option Strategies:

Please be noted that the ATM call of 1w expiries are trading 23% more than of its NPV, while implied volatilities of 1w tenors are just shy above 9% and sliding below 8.5% for 1m tenors. Hence, this is perceived as the disparity between IVs and option pricing.

If you are short on an option, IV should shrink away. A writer of an option wishes IV to drop so the premium also should drop accordingly. Please be noted that the short-dated options are less sensitive to IV than long tenured options.

Well, all the prevailing macro standpoints could propel GBPAUD either on upswings or downswings.

Ever since GBPAUD has dropped from the peaks of 2.2397 levels, in the prevailing puzzled environment you could observe that the momentary bulls of this pair struggle to retrace above 38.2% Fibonacci retracements from the lows of and sustain above this level, currently in a consolidation phase trading below EMAs to signal some bearish pressures.

Thus, we advocate below hedging strategy with cost effectiveness that could hedge regardless of the swings on either side.

Hedging Framework:

3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)

The execution: Initiate long in GBPAUD 1M at the money vega put, long 1M at the money vega call and simultaneously, Short 2w (1%) out of the money call with positive theta or closer to zero.Theta is positive; time decay is bad for a buyer, but good for an option writer.

The Vega of a short (sell) option position is negative and an increasing IV is bad. Please be noted that the 1w IVs are just shy above 9%, whereas ATM calls are overpriced 23% more than NPV, hence, we foresee theta would favor due to time decay while writing such exorbitant calls as there exists the disparity between IVs and option pricing.

Hence, we encourage vega longs and short thetas in the non-directional trending pair but slightly favors bearish strategy as the vega signifies the sensitivity of an option’s value owing to a shift in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.