FxWirePro: Bid 2m GBP/JPY skews and customize hedging vehicles

Sterling’s performance against the dollar and euro in January and February has been stronger than we had expected on a combination of less immediate tail risk from Brexit. GBPJPY is no exception in the month of March so far.

Let’s glance at the positively skewed IVs of GBPJPY of 2m tenors still signify the hedgers’ interests in OTM put strikes (upto 146 levels) and isn’t this a luring factor for a shrewd bear. While 2w/2m IVs of ATM contracts are trending above 9.53% and 10.01% respectively that are the suitable combinations for diagonal ratio spreads structures.

Because the higher IVs with well-adjusted positive skewness signify the hedgers’ interest for both OTM call/put strikes. In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs in 2m tenor for long leg and improve odds on options below strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility. Thus, ATM strikes are perceived to be more conducive than the OTMs.

Further GBPJPY upswings and/or weakness suggest building directional strategies as given below and volatility patterns at the same time.

1) In order to mitigate the mounting downside risks and keep them on the check, we advocate adding longs in 2 lots of ATM -0.49 delta puts of 2m tenor while writing 1 lot of 2% OTM put of 2w tenor.

Contemplating IV skewness and ongoing technical trend, we foresee the value of ATM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

2) Dubious and risks averse traders, we advocate buying GBPJPY – USDJPY 1Y ATM straddle spread with equal JPY vega.

3) Alternatively, on hedging grounds, we advocate shorting futures contracts of near-month tenors as the underlying spot FX likely to target southwards 148 levels in the near run and 146 levels in the medium run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into 97 (which is bullish), while hourly JPY spot index was at shy above -73 (bearish) while articulating (at 06:33 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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