FxWirePro: EUR/GBP likely to drag down further but German IFO to cushion, prefer back spreads over naked puts

German Ifo expectations on business climate will be closely viewed today as the German manufacturing PMI surprised on the upside yesterday, whereas the ZEW expectations suggest a decline in Ifo expectations.

We stick to our forecast that the Ifo expectations will decline as the actual situation in Germany has improved, implying the outlook will not continue to look even better. However, it is not likely to have any market implications as long as the Greek situation remains unsolved.

Hence, EUR/GBP will likely to drag down further but German IFO may cushion the slumps, using back spreads keeps safe play instead of naked puts.

Although the current trend has been bearish, we advocate buying back ratio spreads using 2 Out-Of-The-Money puts and 1 In-The-Money put options of EUR/GBP.

In order to execute this strategy as shown in the diagrammatic representation, add 2 lots of longs of (-1%) OTM and (-1.5%) deep OTM put and simultaneously short (1%) ITM put options with the similar maturity.

The delta on combined position should be at 0.35 and negative theta of -15 signifies time decay benefits.