FxWirePro: EUR/GBP risk reversals divulge bears’ bet for slower pace in bullish rout – Bid 1m/3m IV skews to optimise debit call spreads

The implied volatility of ATM contracts for near month expiries of EURGBP is a tad below 8% for 3m tenor and remained below 7.75% for 1m tenor, these tepid IVs among G10 FX space appears to be conducive for overpriced call option writes in bullish hedging strategies as the delta risk reversals are also flashing negative flashes in bullish risk sentiments that signify hedging arrangements for upside risks amid minor corrections over the period of time.

While 1-3m IV skews are also in tandem with this indication, well balanced on both OTM call and puts for 1m tenors, and signifies upside risks for 3m tenors.

Contemplating above OTC market reasoning and fundamental factors we think further upside risks are on the cards amid minor hic-ups, as a result we reckon deploying longs on ATM call option with delta being at around +0.51 in hedging strategies are worthwhile and to reduce the cost of hedging we would also like to write over OTM puts as the northward forecasts remain maximum upto 0.94 mark.

Please note that using above OTC FX market rationale, seek for overpriced OTM calls of 1m expiries where IVs are shrinking below 7.75% (you would get to know this while comparing with NPV of that option), if you see any disparity between pricing and IVs, use that as an optimal opportunity for shorts with a view to reduce cost of hedging.

Hence, with this perspective, we advocate holding a 2-month 0.9025-0.9410 EURGBP call spread, marked at 0bp.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing -43 (which is bearish), while hourly GBP spot index was at 41 (bullish) at 11:52 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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