FxWirePro: EUR/GBP testing resistance at 0.7229, call ladder for short term hedgers

What a puzzling around EUR/GBP, tight range is holding being adamant to test crucial resistance and supports.

The pair is testing a crucial resistance now at around 0.7229 levels, yesterday early Europe sessions we advocated technical call by stating that the pair testing 0.7096 and any breach below this level would mean that weaker trend is intact.

So long term bears are under complete control but as of now this currency cross tested support at 0.7096 levels as many times it has witnessed to show strength at the same levels and bounce back and it has happened yesterday as well. RSI (14) has been showing upward convergence at 52.2291.

We think in case the valuations at this juncture become poor then it is going to be a tough call for euro amid Grexit threat.

Currency Option Strategy: Call ladder (EUR/GBP)

For those who have their FX exposures held in euro, call ladders are recommeded so as to reduce the further potential risks on either side.

Hence, we recommend selling 1M (-1%) in-the-money call, simultaneously buy 1M an at-the-money 0.51 delta call and buy another 1M (1%) out-of-the-money 0.38 delta call.

The combined position should have delta at 0.25 and negative theta close 0.14 or so.

This strategy is likely to fetch an unlimited returns and limited risk when the options trader thinks that the underlying currency will experience significant volatility in the near term.

Maximum returns for the short call ladder strategy is limited if the underlying stock price goes down. In this scenario, maximum profit is limited to the initial credit received since all the long and short calls will expire worthless.

However, if the underlying exchange price rallies explosively, potential profit is unlimited due to the extra long call.