FxWirePro: Deploy EUR/GBP 3-way options straddles bidding 1m OTC tools

EURGBP has been oscillating between a tight range of 0.8994 – 0.8282 levels, but the minor trend remains slightly bearish bias.

3-way options straddle seems to be the most suitable strategy for EURGBP contemplating some OTC sentiments and geopolitical aspects.

The rationale: Well, let’s just quickly glance at OTC outlook before looking at the options strategies. 

Negative bids in the shorter tenors have been observed to the bearish risk reversal atmosphere in the OTC markets, this is interpreted as the hedgers are keen on bearish risks in the short-run, whereas the long-term bullish outlook remains intact.

While positively skewed IVs of EURGBP has been stretched out on either side. This is interpreted as the hedgers' bid for both OTM calls and OTM put options.

Sterling has been able to appreciate significantly as the Geopolitical surface considering the UK Parliamentary developments from the last week’s “meaningful” vote will continue to dominate the domestic focus. Until that emerges the risk of a no-deal Brexit remains in place, leaving the risk of Sterling setbacks high.

Elsewhere, today’s ECB minutes from its January meeting will show the extent to which policymakers are becoming concerned about the slowing in Eurozone growth. The ECB left its interest rate forward guidance, which hints at a late 2019 rise, unchanged in January but that now looks increasingly out of step with market expectations that rates will not be lifted until well into next year.

It remains more expensive to hedge against strong GBP depreciation, which means that an orderly Brexit in whatever shape is still seen as being more likely. However, the risk of things going wrong is high and as a result, we regard any GBP appreciation with much skepticism. 

You see any fresh negative bids in EURGBP risk reversals to the existing bullish setup, it should not be perceived as the bearish scenario changer. Instead, below options strategy could be deployed amid such topsy-turvy outlook.

Options strategy: Keeping above seesaw geopolitical and hedging sentiments under consideration, 3-way straddles versus ITM calls are advocated, the strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 1m tenors, simultaneously, short ITM call of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.

Hence, on hedging as well as trading grounds, initiate above positions with a view of arresting potential FX risks on either side but slightly favoring short-term bearish risks. Courtesy: Sentrix and Saxo

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 100 levels (which is bullish), while hourly GBP spot index was at 183 (highly bullish) while articulating (at 09:06 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex