FxWirePro: EUR/GBP iron butterfly keeps tight hedge as Greece referendum weighs on euro

The Greek referendum scheduled for Sunday leaves the near-term outlook for risky and EM assets uncertain. The developments in Greece have induced some volatility into EM assets over the past week, particularly in the CEE region.

However, we maintain our view that contagion from Greek developments should remain contained and, even in the event of a "no" vote, we see them as a rather temporary driver of volatility that could ultimately create select buying opportunities.

Currency Option Strategy: (EUR/GBP)

In order to execute an iron butterfly, the options trader goes long on a deep strike OTM put, shorts an ATM put, shorts an ATM call and long on another deep strike OTM call. This results in a net credit to put on the trade.

We recommend buying EUR/GBP 7D deep (1.5%) Out-Of-The-Money 0.19 delta call while selling EUR/GBP 7D ATM call and simultaneously buying EUR/GBP 7D deep (-1.5%) Out-Of-The-Money -0.17 delta put while selling EUR/GBP 7D At-The-Money put for a net credit at around as shown in the diagrammatic representation. The combined position should have delta at close to zero.

Please be cautious on implied volatility, if there is high IV then this strategy would not be advisable.

The iron butterfly spread is a limited risk and limited profit trading strategy that is structured for a larger probability of earning a smaller limited profit when the EUR/GBP exchange rate is perceived to have a low volatility.