FxWirePro: EUR/GBP ATM puts seem costlier, option arbitration in lieu of shorts on reducing IV

The implied volatility of ATM contracts is at 9.25% and it is expected to reduce at around 8.5% for near month expiries of this the pair.

NPV of 1m ATM call is at 712.52 while the Premiums trading above 9.40% at GBP 779.73 for lot size 100,000 units.

NPV of ATM put is at 670.68 while Premiums trading above 10.02% at GBP 737.91 for lot size 100,000 units.

Thereby, comparing this difference in options premiums and NPV with implied volatility in market sentiments we think the hedging cost would not be economical on downside deploying ATM put instruments.

But we cannot afford to get stuck in this riddle without hedging, so what's the alternative, in forwards markets at least..?

Subsequently, here comes the strategy arbitrage strategy in which options trading that can be performed for a riskless profit as EURGBP ATM call options are overpriced relative to the underlying exchange rate of EURGBP.

To perform this conversion, the hedger holds the underlying spot FX and offset it with an equivalent synthetic short spot FX (long put + short call) position.

Profit is locked in immediately when the conversion is done, the profit would be strike price of call/put - purchase price of underlying + call premium - put premium.