The implied volatilities flashed screaming off as the euro crosses tumbled reasonably ahead of the data events in this week, especially German & French CPI and euro area trade balance.
The above table ranks in rising implied volatility among G20 currency crosses, euro's vols against sterling and dollar are shrinking away due to this week's economic events but likely stabilize in coming months.
IV and risk reversal readings of EURUSD and EURGBP have been the best bets on shorting opportunity in options and buying signals respectively on the respite from sellers.
The implied volatility of ATM contracts for EURGBP of 1 week expiries have dipped below 10% (9.65% to be precise) and are spiking sky rocketed above 14% of far- month expiries which is the second highest among G10 currency space.
While delta risk reversals flashing up progressively with positive numbers over long term that signify hedging arrangements for upside risks but for next a month or so it has been bullish neutral, correlating this with IVs and daily price behaviour on technical charts some minor corrections are likely.
At such circumstances, OTM call strikes lure reducing the hedging costs as lowering IVs with neutral risk reversals unlikely to show upside risks.
But, considering long term OTC market positioning we think upside risks are on the cards in next 3 months duration, as result we reckon deploying longs in ITM instruments in hedging strategies are worthwhile and shorts in OTM strikes with narrowed tenors.
At spot reference of EURGBP - 0.8015, and is anticipated to remain either in sideways or slightly weaker in short run and spike up again moderately in the future.
Hence, we decide to initiate a diagonal debit spreads at net credits capitalizing on IVs, RR and overpriced OTC calls.
So, buy near month (-0.70) in the money calls with 50% delta, simultaneously, short 1W (-1%) out of the money calls with positive theta.


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