FxWirePro: ECB sets to act – 3-way straddles to hedge EUR/GBP topsy-turvy trend

The account of the last ECB Council meeting in early June, published today, confirms that the central is ready to ease the monetary policy stance further, without giving any hint how exactly a package of new measures might look like. The Council seems to be open to introduce a tiered rate system in the event of policy rates remaining lower for longer than currently assumed.

At the last ECB press conference on June 6th, ECB president Draghi stirred up some hope that the account of the last policy meeting might reveal some more details what exactly the ECB might decide in case of a decision in favour of further measures. In June, Draghi had stressed that the discussion among Council members at the June meeting had become "more granular in the sense that – and you'll see this in the accounts of the meeting – in the sense that several members raised the possibility of further rate cuts, ... the possibility of restarting the asset purchase programme, or further extensions in the forward guidance." Hence, it could have been expected that the account published today contains some pros and cons of specific measures.

OTC Updates: Well, ahead of these events, let’s just quickly glance at OTC outlook before looking at the options strategies. 

Bullish neutral risk reversals of EURGBP have been observed to the broader bullish risk outlook in the FX OTC markets, this is interpreted as the hedgers are still keen on bullish risks but with mild downside risk sentiment in the near-term, while the pair displays 6.49-6.82% of IVs.

While positively skewed IVs of EURGBP has been balanced on either side. The bids for both OTM calls and OTM puts are seen, which means underlying hedging sentiments of spot FX are for both sides. That is why we titled it as topsy-turvy trend. This is conducive for options holders of both OTM call and put options.

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

3-way options straddle versus ITM calls are advocated seem to be the most suitable strategy for EURGBP contemplating some OTC sentiments and geopolitical aspects.

Options Strategy: 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 (1%) ITM puts 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, Saxo and Commerzbank