FxWirePro: Black Scholes optimizes GBP/JPY straddle shorting and lower IV wins trade

Please be noted that the holders of straddle must be betting realized volatility would exceed the implied volatility. As a result of technical observation we look ahead for slight dips in the near future but sideways in medium term. More importantly implied volatility of near month ATM calls for this pair is seen at 6.06% which is quite lower side and it is expected to lower further.

If one commits to outlook of sideways trend, we want to set ourselves up for maximum and certain gains when IV is significantly lower than the realized vols. But what if it is the other way round, then that should be a red flag.

At this point, after some dips as anticipated earlier, the pair on weekly chart has been range bounded (195.180-190.787) with contraction of volatility, the absolute premium simply is not worth the risk of the trade, for an instance it would not be wise to short far months deep out of the money strangles for negligible premiums no matter what the implied volatility was. With the available knowledge of chances of big moves ahead of fed's rate uncertain decision, it's hard to justify risking pounds to make a dime.

Keep an ideal delta: The delta, as it measures the speed at which the option price moves with respect to the underlying. But don't really bother about the sign (negative or positive) of the delta, just focus on the magnitude value of the delta. It points toward that on either side (upward or downward), the short straddle is highly sensitive to the underlying price movements and will adversely affect the short straddle options trader position. The zero value of delta is near the ATM strike price indicating benefit to the trader.

Everyone could afford to be afraid of underlying exchange rate GBP/JPY abruptly reacts while moving 3 or more standard deviation, stay calm, this occurs only when extreme political event or drastic economical change for now the only big blow is Fed's rate rumours.  So, at this juncture Out of the money calls and puts with reasonably positive theta keeps portfolios rest assured.