FxWirePro: British trade deficit alarms hedging GBP with debit put spreads; Swing trade with ATM binary puts

Technical glance: (GBP/JPY)

On weekly chart of this pair shows doji pattern on market peak which means an earlier trend reversal is boiling on. In additional to that there are hanging man patterns candles occurred at 192.110 and 190.600 levels which can be deemed as further confirmation.

But before jumping into a conclusion please note that this is for short term basis as the previous intermediate trend has been uptrend.

EOD chart offers buying opportunities in binary puts for a spot FX targets at 191.185. So trade idea would either be sell spot FX on rallies or buy binary puts on rallies.

Currency Option Strategy: Bear Put Spread (GBP/JPY)

Rationale: As noted earlier the sharp narrowing trade deficit numbers also indicate a positive contribution from net trade to UK GDP growth in Q2. However, given the volatility of the external trade data, this narrowing is unlikely to have been sustained in May and some deterioration in the trade balance is expected. Trade balance numbers are expanded at -8.0 billion while construction o/p expanded at -1.3% from previous -0.5%  and Production Price Index MoM reduced at 0.0% from previous 0.1%. We feel GBP is in good shape but is it good enough to keep our currency exposures in naked positions has been tough call.

Therefore, bear put spread shall be used over Protective Put as the premiums on naked puts prove too costlier.

Bear Put Spread = ATM Protective Put (192.039) + Sell another Put with lower Strike Price (Out of the Money = 188.575).

Bear Put Spread reduces the cost of hedge by the premium collected on the OTM put and keeps hedger to participate on upward moves but it comes at the expense of Partial hedge rather than a complete hedge.